Vol. 78 Wednesday, 

No. 74 April 17, 2013 

Part III 

Library of Congress 

Copyright Royalty Board 

37 CFR Part 382 

Determination of Rates and Terms for Preexisting Subscription Services 

and Satellite Digital Audio Radio Services; Final Rule 

mstockstill on DSK4VPTVN1PROD with RULES3

23054 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

1 During the course of the proceeding, Chief Judge 

Sledge and Judge Wisniewski retired. Judge Sledge 

retired in April 2012 before the start of oral 

testimony. The Librarian of Congress appointed his 

successor, Chief Judge Barnett, in April 2012. Judge 

Wisniewski retired on August 31, 2012, after the 

conclusion of oral testimony; the Librarian 

appointed an interim Copyright Royalty Judge, 

Judge Strasser, on September 17, 2012, pending the 

appointment of Judge Wisniewski’s successor. 

2The Judges did not consider all of the offered 

testimony. Ruling on motions to strike or exclude, 

the Judges edited or excluded testimony during the 

course of the hearing. This determination is based 

solely on the evidence the Judges admitted. 

LIBRARY OF CONGRESS 

Copyright Royalty Board 

37 CFR Part 382 

[Docket No. 2011–1 CRB PSS/Satellite II] 

Determination of Rates and Terms for 

Preexisting Subscription Services and 

Satellite Digital Audio Radio Services 

AGENCY: Copyright Royalty Board, 

Library of Congress. 

ACTION: Final rule and order. 

SUMMARY: The Copyright Royalty Judges 

are announcing their final 

determination of the rates and terms for 

the digital transmission of sound 

recordings and the reproduction of 

ephemeral recordings by preexisting 

subscription services and preexisting 

satellite digital audio radio services for 

the period beginning January 1, 2013, 

and ending on December 31, 2017. 

DATES: Effective date: April 17, 2013. 

Applicability date: The regulations 

apply to the license period January 1, 

2013, through December 31, 2017. 

ADDRESSES: The final determination also 

is posted on the Copyright Royalty 

Board Web site at http://www.loc.gov/ 

crb. 

FOR FURTHER INFORMATION CONTACT: Gina 

Giuffreda, Attorney Advisor. Telephone: 

(202) 707–7658. Telefax: (202) 252– 

3423. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The Copyright Royalty Judges 

(‘‘Judges’’) convened this rate 

determination proceeding in accordance 

with 17 U.S.C. 803(b) and 37 CFR 351. 

On January 5, 2011, the Judges 

published in the Federal Register a 

notice announcing commencement of 

this proceeding with request for 

Petitions to Participate in this 

proceeding. The purpose of the 

proceeding is to determine the rates and 

terms of royalty payments payable by 

Preexisting Subscription Services 

(‘‘PSS’’) and Satellite Digital Audio 

Radio Services (‘‘SDARS’’) under the 

Copyright Act, 17 U.S.C. 112 and 114. 

The rates and terms set in this 

proceeding apply to the period January 

1, 2013, to December 31, 2017. Having 

carefully considered the relevant law 

and the evidence received in this 

proceeding, the Copyright Royalty 

Judges determine that the appropriate 

Section 114(f)(1) rates for the PSS are 

8% of Gross Revenues for 2013 and 

8.5% for 2014 through 2017. The 

Section 114(f)(1) rates for Sirius XM are 

9% of Gross Revenues for 2013, 9.5% 

for 2014, 10.0% for 2015, 10.5% for 

2016, and 11.0% for 2017. 

A. The 2012 Proceeding 1

The following entities filed Petitions 

to Participate and were the only 

remaining, non-settling participants at 

the time of hearing: SoundExchange, 

Music Choice, and Sirius XM. On May 

25, 2012, the participants submitted a 

stipulation in which they agreed to the 

proposed Section 112 license rates and 

terms. 

On June 5, 2012, the remaining 

participants in the proceeding 

commenced the direct case relating to 

Section 114 rates and terms. The Judges 

heard the rebuttal case beginning 

August 13, 2012. All parties presented 

evidence in the form of written 

testimony, live testimony, documentary 

evidence,2 and oral argument by 

counsel. Participants also designated 

background testimony from the last rate 

determination relating to SDARS and 

PSS. The parties submitted written 

proposed Findings of Fact and 

Conclusions of Law and responses to 

the same. On October 16, 2012, all 

parties presented closing argument. In 

all, the Judges heard evidence and oral 

argument for a period of 19 days. The 

parties presented 32 fact and expert 

witnesses. 

The Judges make this Final 

Determination of Rates and Terms 

pursuant to 17 U.S.C. 803(c)(2) and 37 

CFR Part 353. After evaluating the 

evidence to determine a range of 

reasonable royalty rates based on market 

benchmarks, the Judges subjected those 

presumed rates to the policy analysis 

required by 17 U.S.C. 801(b) of the Act. 

On December 14, 2012, the Judges 

issued to the parties their Initial 

Determination. Pursuant to 17 U.S.C. 

803(c)(2) and 37 CFR Part 353, 

SoundExchange and Sirius XM each 

filed a motion for rehearing. The Judges 

requested responses from the parties 

regarding each of the motions. Order 

Requesting Responses to Motions for 

Rehearing, Docket No. 2011–1 CRB PSS/ 

Satellite II (Jan. 8, 2013). 

SoundExchange and Sirius XM each 

filed timely responses. After reviewing 

both motions and the responses thereto, 

the Judge denied both motions for 

rehearing. Order Denying Motions for 

Rehearing, Docket No. 2011–1 CRB PSS/ 

Satellite II (Jan. 30, 2013). As explained 

in the January 30, 2013, Order, the 

Judges determined that none of the 

grounds set forth in the motions 

constituted the type of exceptional 

case—namely, (1) an intervening change 

in controlling law, (2) the availability of 

new evidence, or (3) a need to correct 

a clear error or prevent manifest 

injustice—warranting a rehearing. Id. 

The Judges agreed with the parties, 

however, that clarification was needed 

in order to prevent ‘‘an unintended 

double exclusion’’ from Gross Revenues 

for the Direct License Share in 

§ 382.12(d) and the Pre-1972 Recording 

Share in § 382.12(e). Id. at 5. After 

reviewing the respective proposals of 

SoundExchange and Sirius XM, the 

Judges adopted Sirius XM’s proposal, 

finding that ‘‘Sirius XM’s approach 

adequately addresses SoundExchange’s 

double credit concern and in a way that 

may help to ensure a more accurate 

reflection of the legal status of the pre1972 recordings with respect to the 

licenses at issue in this proceeding.’’ Id. 

Consequently, in this Final 

Determination, the Judges adopt Sirius 

XM’s proposed language which will 

appear as § 382.12(d)(4): ‘‘No 

performance shall be credited as an 

Internet Performance of a DirectlyLicensed Sound Recording under this 

section if that performance is separately 

credited as an Internet Performance of a 

Pre-1972 sound recording under 

paragraph (e)(1) of this section.’’ 

B. Prior Proceedings 

For the current licensing period, the 

Judges adopted agreed royalty rates for 

the PSS and made a determination of 

applicable rates for SDARS after a 

contested hearing. The Judges caused 

the prior SDARS determination 

[hereinafter SDARS–I] to be published 

in the Federal Register [hereinafter FR] 

at 73 FR 4080 (Jan. 24, 2008). 

The Judges’ predecessors considered 

the reasonable rate standard and the 

Section 801(b)(1) policy factors in three 

prior proceedings: a Section 116 

jukebox rate adjustment by the 

Copyright Royalty Tribunal 

(‘‘Tribunal’’); a Section 115 mechanical 

rate adjustment, also by the Tribunal; 

and a proceeding under the Copyright 

Arbitration Royalty Panel (‘‘CARP’’) 

system administered by the Librarian of 

Congress (‘‘Librarian’’) for preexisting 

subscription services under Section 

114(f)(1)(B), the same section involved 

in this proceeding. Participants sought 

judicial review of all three prior 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23055 

3The ephemeral license requires the Judges, 

among other things, to ‘‘establish rates that most 

clearly represent the fees that would have been 

negotiated between a willing buyer and a willing 

seller.’’ 17 U.S.C. 112(e)(4). The ephemeral license 

requires adoption of a minimum fee for each type 

of service offered by a transmitting organization. 

4The Judges followed the same approach in 

determining royalty rates for the Section 115 

mechanical license, the only proceeding involving 

the Section 801(b)(1) factors decided since SDARS– 

I. See, Phonorecords I, 74 FR 4510 (Jan. 26, 2009). 

None of the parties in this proceeding contend that 

this approach is erroneous or must be abandoned. 

5The PSS are Music Choice and Muzak. Muzak’s 

PSS service is, apparently, only a small part of its 

business, and it did not participate in this 

proceeding. Digital Music Express, Inc., which was 

a PSS in SDARS–I, ceased operation. 6/11/12 Tr. 

1469:14–1470:6 (Del Beccaro). 

determinations. A fuller history of prior 

proceedings and the outcomes and 

resolutions of those proceedings is 

included in SDARS–I. See 73 FR 4080, 

4082–4085 (Jan. 24, 2008). 

In Recording Indus. Ass’n of America 

v. Copyright Royalty Tribunal, 662 F.2d 

1 (DC Cir. 1981), the U.S. Court of 

Appeals for the DC Circuit discussed its 

judicial review standard. The DC Circuit 

concluded that 

To the extent that the statutory objectives 

[set forth in Section 801(b)] 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 (footnotes omitted). 

In 1993, Congress replaced the 

Tribunal with the CARP system. In 

1995, Congress passed the Digital 

Performance Right in Sound Recordings 

Act of 1995, creating the Section 114 

digital performance right license that is 

the subject of this proceeding. The 

Copyright Royalty Distribution and 

Reform Act of 2004 established the 

Copyright Royalty Judges as a decisionmaking body in the Library of Congress. 

The Judges follow relevant precedent of 

the Tribunal and CARP system and 

strive to adopt reasonable royalty rates 

that satisfy the policy objectives set 

forth in Section 801(b). To determine 

rates, the Judges begin with an analysis 

of proposed market benchmarks, if any, 

and voluntary license agreements as 

described in Section 114(f)(1)(B), and 

the participants’ supporting testimony. 

The Judges then measure the rate or 

range of rates that process yields against 

the statutory policy objectives to reach 

a determination of rates and terms. 

II. The Standard for Determining 

Royalty Rates 

Section 801(b)(1) of the Copyright Act 

provides that the Judges shall ‘‘make 

determinations and adjustments of 

reasonable terms and rates of royalty 

payments’’ for the statutory licenses set 

forth in Sections 114(f)(1) (‘‘digital 

performance license’’) and 112(e) 

(‘‘ephemeral license’’) of the Act. These 

licenses contain similarities and 

important differences in their standards 

for setting royalty rates. Both require the 

determination of reasonable rates and 

terms. The digital performance license 

requires that the rates (but not the 

terms) be calculated to achieve the 

following objectives: 

• To maximize the availability of 

creative works to the public. 

• 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. 

• 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. 

• 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).3

The participants in this proceeding 

reached agreement on the rates and 

terms of the Section 112 license prior to 

the hearing; consequently, the focus of 

this determination is the application of 

the Section 801(b) factors to Section 114 

rates. In SDARS–I, the Judges set forth 

in great detail the historical treatment of 

these factors by the Tribunal and the 

Librarian in his administration of the 

CARP system. See, SDARS–I, 73 FR at 

4082–84. Consideration of this history 

produces the following approach. 

[The Judges] shall adopt reasonable royalty 

rates that satisfy all of the objectives set forth 

in Section 801(b)(1)(A)–(D). In doing so, [they 

will] begin with a consideration and analysis 

of the [market] benchmarks and testimony 

submitted by the parties, and then measure 

the rate or rates yielded by that process 

against the [Section 801(b)] statutory 

objectives to reach [a] decision * * *. 

The issue at hand is whether these policy 

objectives weigh in favor of divergence from 

the results indicated by the benchmark 

marketplace evidence. 

Id. at 4084, 4094 (citations omitted).4

In this proceeding, Music Choice 

argues that the Judges must consider an 

additional factor, applicable only to the 

PSS rate. Music Choice parses the 

Librarian’s PSS determination 

[hereinafter, PSS–I], 63 FR 25394 (May 

8, 1998), and Section 803(a)(1) to 

conclude that the Judge’s benchmark 

analysis must begin with the current 

royalty fees paid by Music Choice to the 

performing rights societies (ASCAP, 

BMI and SESAC) for musical works. 

Music Choice contends that the 

Librarian’s use of the musical works 

benchmark in 1998 mandates that the 

Judges must use that same benchmark in 

these proceedings in the absence of a 

better, comparable benchmark. See 

Music Choice PCL ¶ 53. 

The Judges reject Music Choice’s 

argument for several reasons. First, 

Music Choice does not, and cannot, cite 

any statutory license rate proceeding in 

which the adjudicator found that factual 

marketplace observations in a particular 

royalty rate proceeding must be given a 

priori consideration in a subsequent 

proceeding. Second, in the PSS–I 

decision, the Librarian did not rely 

solely upon the musical works 

benchmark, but instead relied upon 

some unspecified combination of 

factors. See PSS–I, 63 FR at 25410. Even 

if the Judges were inclined to accord 

some precedential value to the musical 

works benchmark from PSS–I in this 

proceeding, the Judges cannot discern 

the degree to which that benchmark 

influenced or altered the Librarian’s 

decision. 

Third, Music Choice fails to place the 

PSS–I decision in its historical context. 

The Librarian had before him for 

consideration only the musical works 

fees and the Music Choice partnership 

license agreement. The Judges have 

more evidence in this proceeding upon 

which to base a decision. 

Therefore, in this proceeding, the 

Judges consider the musical works 

evidence offered by Music Choice not as 

binding precedent but as evidence 

offered in the normal course, along with 

all other current evidence, not giving 

the musical works benchmark any 

preference as a starting point for, default 

position in, or other limitation on a 

proper evaluation of all of the 

benchmark evidence. 

III. Determination of the Royalty Rates 

The Judges have considered carefully 

the relevant law and the evidence 

received in this proceeding. Based upon 

that evidence and law, and for the 

reasons detailed in the following 

discussion, the Judges have determined 

applicable royalty rates for the licensing 

period January 1, 2013, through 

December 31, 2017, for the only existing 

SDARS, Sirius XM, and for the PSS.5

IV. The Section 112 Ephemeral License 

With respect to the Section 112(e) 

ephemeral license, the parties submitted 

a joint stipulation. SoundExchange and 

mstockstill on DSK4VPTVN1PROD with RULES3

23056 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

6The current regulation defining Gross Revenues 

for PSS is set forth in 37 CFR 382.2(e). As discussed 

infra, the Judges are adopting SoundExchange’s 

proposal to house all PSS definitions in a single 

location; consequently, the PSS definitions will be 

located in a new § 382.2. 

7The definitions of ‘‘revenues’’ used to calculate 

the different musical works royalties are not 

revealed in the evidence, nor is the ‘‘revenue’’ to 

which the [REDACTED] could be applied for 

comparison. 

8SoundExchange’s expert economist, Dr. George 

Ford, who recently submitted testimony before the 

Canadian Copyright Board, acknowledged that in 

Canada the musical composition and sound 

recording performance royalties are equal. 8/21/12 

Tr. 4304:5–22 (Ford). 

9 Dr. Crawford concludes that his economic 

model confirms that the sound recording 

performance royalty rate for PSS should be less 

than its musical works rate. 6/12/12 Tr. 1803:11– 

1804:20 (Crawford); see also Crawford Corrected 

WDT at 6, 23, 25, 30, PSS Trial Ex. 4. 

10 ‘‘Combined Agreement Surplus’’ is the revenue 

a PSS would earn in the market for the PSS 

provider when an agreement is reached with the 

record label less the costs net of the digital 

performance right in sound recordings. Crawford 

Corrected WDT at 16, PSS Trial Ex. 4. ‘‘Surplus’’ 

is the payment a good or service can command 

beyond its cost of production. Id. at n.33. 

Music Choice ask for continued 

application of the language of 37 CFR 

382.2(c), which requires a minimum fee 

advance payment of $100,000 per year, 

payable no later than January 20 of each 

year, with royalties accruing during the 

year recoupable against the advance. 

Joint Stipulation at 2–3 (May 25, 2012). 

SoundExchange and Sirius XM ask that 

the same minimum fee proposal apply 

to Sirius XM. Id. 

All parties agree that the value 

accorded the Section 112 license is 

combined with that of the Section 114 

license and that the value is allocated 

5% to the Section 112 license and 95% 

to the Section 114 license, consistent 

with the current regulations applicable 

to webcasters, broadcasters, SDARS, and 

new subscription services. See 37 CFR 

380.3, 380.12, 380.22; 382.12; and 383.3. 

The parties submitted no other evidence 

on either the minimum fee or the 

Section 112(e) license fee allocation; 

consequently, the Judges approve and 

adopt the respective minimum fees and 

Section 112(e) royalty rates for PSS and 

SDARS as set forth in the Joint 

Stipulation. 

V. The Section 114 Digital Performance 

License 

With respect to the royalty rates for 

the Section 114 digital performance 

license, Music Choice requests a rate of 

2.6% of Gross Revenues, applicable to 

each of the years in the licensing period. 

SoundExchange requests the following 

percentage of Gross Revenues rates for 

the PSS: 15% for 2013; 20% for 2014; 

25% for 2015; 35% for 2016; and 45% 

for 2017. Second Revised Proposed 

Rates and Terms of SoundExchange, 

Inc., at 6 (Sept. 26, 2012). Both 

SoundExchange and Music Choice ask 

that the definition of Gross Revenues, 

currently set forth in 37 CFR 382.2(e), 

apply in the new licensing period. 

A. Section 114 Rates for PSS 

Since 1998, when the decision in 

PSS–I established the initial royalty 

rates, the PSS have paid a fee based on 

a percentage of Gross Revenues 6 as 

defined by regulation. Neither Music 

Choice nor SoundExchange proposes 

altering this rate structure for the 2013– 

17 license term, nor do they propose 

changes to the Gross Revenues 

definition. As discussed in detail below, 

however, SoundExchange requests that 

the Judges add an adjustment to the 

percentage-of-revenue metric to address 

what it perceives as a deliberate 

reduction in revenues paid to Music 

Choice for its residential audio service 

by certain cable operators that are coowners (partners) of Music Choice. 

The rates the Judges establish under 

Section 114(f)(1) for the digital 

performance of sound recordings must 

be calculated to achieve the objectives 

set forth in Section 801(b)(1)(A) through 

(D) of the Act. Where the determination 

standard is reasonable rates calculated 

to achieve the Section 801(b)(1) factors, 

the Judges have found market 

benchmarks, if any, to be a useful 

starting point. See SDARS–I, 73 FR at 

4088; Phonorecords I, 74 FR 4510, 4517 

(Jan. 26, 2009). As discussed below, the 

parties disagree about what constitutes 

the most appropriate benchmark to 

guide the Judges in determining a 

reasonable rate. 

1. Music Choice’s Proposed Musical 

Works Benchmark for PSS Rates 

As discussed above, Music Choice 

argues that the annual royalties it pays 

to the three performing rights societies 

(ASCAP, BMI, and SESAC) for the right 

to perform musical works to subscribers 

of its residential audio service is, by 

virtue of the Librarian’s determination 

in PSS–I, a precedential benchmark in 

this proceeding. Although the Judges 

reject the PSS–I benchmark as a 

precedent in this proceeding, they 

nevertheless weigh whether the rates are 

a useful benchmark in this proceeding. 

Music Choice represents that it pays 

ASCAP and BMI each 2.5% of gross 

revenues attributable to residential 

service each and pays an annual flat fee 

to SESAC that amounts to 

approximately [REDACTED] of net 

revenue, for a total of [REDACTED].7

Del Beccaro Corrected WDT at 21–22, 

MC 17, MC 18 and MC 19, PSS Trial Ex. 

1. Music Choice submits that this rate 

(i.e., [REDACTED]) represents the upper 

bound of a reasonable royalty rate for 

the Section 114 and Section 112 

licenses. 

Two pieces of evidence, in Music 

Choice’s view, corroborate use of 

musical works licensing rates as a 

benchmark. First, Music Choice 

observes equivalence between the fees 

for the performance of sound recordings 

and musical works in Canada and the 

United Kingdom. Music Choice cites 

four decisions of the Canadian 

Copyright Board, involving licensing 

fees for commercial radio, cable 

television, satellite music services and 

radio services of the Canadian 

Broadcasting Corporation (‘‘CBC’’). 

According to Music Choice, in those 

decisions, the Canadian Board found 

that royalty rates for sound recordings 

and musical compositions have 

equivalent value. See, e.g., Del Beccaro 

Corrected WDT at MC 6 at 30–33 

(commercial radio) and MC 7 at 14 

(cable television), PSS Trial Ex. 1.8

Moreover, Music Choice represents that 

in the United Kingdom, sound recording 

royalty rates for commercial 

broadcasting services are less than those 

for musical works. Id. at 19. According 

to Music Choice, if Music Choice’s 

service were transmitted through cable 

in the U.K., Music Choice would pay 

5.25% of 85% of gross revenues for the 

musical works performance right, but 

would pay only 5% of 85% of gross 

revenues for the sound recording 

performance right. Id. at 19, MC 11. 

Music Choice represents that the U.K. 

Copyright Tribunal has found the same 

equivalence. Id. at 19–20 & MC 12, ¶ 53. 

Music Choice further asserts that the 

validity of the proposed musical works 

benchmark to set rates in this 

proceeding is corroborated by an 

economic model called the Asymmetric 

Nash Bargaining Framework (‘‘Nash 

Framework’’) offered by Dr. Crawford.9

Dr. Crawford uses the Nash Framework 

to determine potential outcomes that 

could occur in hypothetical negotiations 

between record labels and PSS 

providers. Crawford Corrected WDT at 

12, PSS Trial Ex. 4. According to Dr. 

Crawford, as a non-cooperative 

bargaining model, the Nash Framework 

is designed to yield predictions about 

how outcomes are determined when 

firms negotiate; that is, how two firms 

would split the surplus of their 

interaction (i.e., revenues minus costs) 

in a hypothetical negotiation. Id. at 16. 

Three factors (the Nash factors) are 

analyzed to determine the split: (1) The 

combined agreement surplus; 10 (2) each 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23057 

11 ‘‘Threat point’’ is the amount a firm would earn 

in the absence of an agreement. Crawford Corrected 

WDT at 16, PSS Trial Ex. 4. 

12To support its contention that PSS are 

promotional for record company artists, Music 

Choice offered the testimony of Damon Williams, 

who testified that record company executives 

consider Music Choice promotional because they 

provide artists with greater exposure. Williams 

WDT at 4–13, MC 28, MC 29, MC 32, PSS Trial Ex. 

3. Mr. Williams argues that Music Choice has 

become more promotional since the PSS–I 

proceeding because it currently reaches more 

customers with more channels. Id. at 24. 

13 Dr. Crawford discounted the promotional value 

of Music Choice because he could not quantify it. 

Crawford Corrected WDT at 45, PSS Trial Ex. 4. 

14Under this model, a firm’s cost of capital is 

based on the expected return to induce investment. 

Crawford Corrected WDT at ¶ 167, PSS Trial Ex. 4. 

firm’s ‘‘threat point’’; 11 and (3) each 

firm’s bargaining power. Id. 

Dr. Crawford’s stated goal in applying 

the Nash Framework was to first 

establish the Nash factors for the 

hypothetical market (the sale of rights 

between one record company and one 

PSS provider) and compare them to the 

Nash factors in the actual musical works 

market (the sale of rights between the 

three performing rights societies and 

one PSS provider). Id. at 18. Dr. 

Crawford determined that the combined 

agreement surplus in the hypothetical 

PSS market was the total profits that the 

PSS provider earned before paying the 

royalty for digital performance rights. 

Id. at 45. 

Dr. Crawford determined that in the 

hypothetical market, the threat point for 

a PSS provider would be zero because, 

in the absence of an agreement, the PSS 

provider could not offer music and 

therefore could not earn a surplus. Id. at 

19. He determined, however, that the 

threat point for a hypothetical record 

company would be negative because the 

failure to reach an agreement would 

have negative implications for the 

record company in other, non-PSS 

markets. Specifically, a record 

company’s failure to reach an agreement 

with a PSS provider could diminish that 

record company’s sales of compact 

disks, because, according to Music 

Choice, there is a significant 

promotional benefit to the record 

company from the PSS.12, 13 Id. 

With respect to the last Nash factor, 

bargaining power, Dr. Crawford 

assumed it to be equal based on his 

assessment of Music Choice’s existing 

technology platform and contract, 

which, he contended, cannot be easily 

replaced or replicated, and his 

observations of Music Choice’s 

bargaining efforts for sound recording 

performance rights with respect to 

music videos. Id. at 15, 22. 

Applying the Nash factors to the 

existing market for the PSS musical 

works performance right, Dr. Crawford 

determined that the threat point for a 

PSS provider would again be zero. He 

determined that the ‘‘threat point’’ for 

the performing rights society would be 

negative due to the predicted loss of 

promotional value from the PSS. Id. at 

28. Dr. Crawford again assumes equal 

bargaining power between the PSS 

provider and the performing rights 

society, based largely upon his 

observations that the two possess equal 

patience in their negotiations. Id. at 29. 

Dr. Crawford opines that his analysis of 

the Nash factors in the hypothetical 

musical works market indicates that 

there should be a 50/50 split of the 

surplus in hypothetical negotiations 

between the PSS and the performing 

rights society, the same conclusion he 

reached with respect to the hypothetical 

market for the rights in this proceeding. 

Because of the similarities between the 

Nash factors in the PSS hypothetical 

market and the market for musical 

works, Dr. Crawford concludes that the 

musical works market makes for a good 

benchmark for the hypothetical sound 

recording performance right market at 

issue in this proceeding. Id. at 30. 

Dr. Crawford also proffered a surplus 

splitting analysis which he asserted 

helped to corroborate the 

reasonableness of Music Choice’s rate 

proposal. This analysis involved Music 

Choice’s own operating profits to 

estimate how PSS profits would be 

allocated between a Licensee and 

Licensor in the PSS market. Crawford 

Corrected WDT at 43, PSS Trial Ex. 4. 

Dr. Crawford adjusted Music Choice’s 

2006–2010 operating profit to remove 

the actual royalty paid by Music Choice 

for sound recording performance rights. 

He then applied the capital asset pricing 

model 14 to derive an expected rate of 

return on Music Choice’s assets. He 

determined that that hypothetical rate of 

return would be 8.33%. Id. at Appendix 

B.3, B.4. He then multiplied the 8.33% 

rate by Music Choice’s average 

operating profits to determine cost of 

capital. He then subtracted cost of 

capital from the royalty-adjusted 

operating profits to derive the residual 

profits for each year. Id. at 47. 

According to Dr. Crawford, this 

calculation showed that Music Choice’s 

cumulative returns in excess of its cost 

of capital, but before payment of sound 

recording royalties, would amount to 

3.05% of Music Choice’s 2006–2010 

royalties. Id. He then applied a range of 

allocations for the hypothetical 

cumulative returns of between 20% and 

80%. This calculation yielded a range of 

royalties from 0.61% to 2.43%. Id. at 48. 

2. SoundExchange’s Proposed 

Marketplace Agreements Benchmark for 

PSS Rates 

In an effort to frame a zone of 

reasonable rates, SoundExchange offers 

rates from over 2,000 marketplace 

agreements, representing a variety of 

rights licensed. SoundExchange 

witness, Dr. George Ford, observes that 

PSS like Music Choice have certain 

distinctive features that make it difficult 

to identify a suitable benchmark market. 

6/18/12 Tr. 2814:9–20 (Ford). First, 

according to Dr. Ford, Music Choice 

does not sell its service directly to 

subscribers, but rather to cable 

television operators who then bundle 

the Music Choice programming with a 

package of television programming for 

ultimate sale to subscribers. Music 

Choice is, therefore, an intermediary 

between cable operators and their 

subscribers, unlike any of the digital 

music services the Copyright Royalty 

Judges have previously dealt with. Ford 

Second Corrected WDT at 12–13, SX 

Trial Ex. 79; 6/18/12 Tr. 2810:20–2811:4 

(Ford). Second, Music Choice’s service 

is almost always bundled with a 

hundred or more channels of video and 

is almost never sold on a stand-alone 

basis. Ford Second Corrected WDT at 

13, SX Trial Ex. 79. According to Dr. 

Ford, this bundling makes it difficult to 

determine the specific consumer value 

for Music Choice’s programming alone. 

Id. 

Given these difficulties, Dr. Ford uses 

an all-inclusive approach of examining 

royalty rates for different digital music 

markets: portable and non-portable 

interactive subscription webcasting, 

cellular ringtones/ringbacks, and digital 

downloads. Id. at 15–16, Table 1. 

According to Dr. Ford, most of the over 

2,000 licensing agreements he examined 

across these markets calculate royalties 

based on a ‘‘greater of’’ (sic.) 

methodology that includes a per-play 

royalty fee, a per-subscriber fee, and a 

revenue-based fee. Id. at 13 n.21. Dr. 

Ford analyzed only the revenue-based 

fees. He contended that doing so makes 

his results conservative because either 

of the other two payment metrics could, 

under certain circumstances, result in a 

larger total royalty fee than the revenuebased calculation. 6/18/12 Tr. 2861:3– 

13 (Ford). According to Dr. Ford, his 

analysis of the agreements showed a 

percentage-of-revenue rate of 70% for 

digital downloads, 43% to 50% for 

ringtones/ringbacks, and 50% to 60% 

for portable and non-portable interactive 

subscription webcasting, respectively. 

Ford Second Corrected WDT at 15–16, 

Table 1, SX Trial Ex. 79. According to 

Dr. Ford, SoundExchange’s rate 

mstockstill on DSK4VPTVN1PROD with RULES3

23058 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

15See supra at Section II. 

16The fees paid to the performing rights societies 

for the performance right to musical works have 

been offered in non-PSS proceedings and have been 

rejected. See Webcasting II, 72 FR 24084, 24094– 

24095 (May 1, 2007); SDARS–I, 73 FR 4080, 4089– 

4090 (Jan. 24, 2008) and Webcasting I, 67 FR 45240, 

45246–45247 (July 8, 2002) (Librarian of Congress’s 

determination). 17The Judges understand that Judge Roberts in 

his dissent provides a more spirited rejection of the 

probative value of the Nash Framework as proffered 

in this context. The Judges concur with his 

assessment, but believe, as a threshold matter, that 

the Nash Framework, without real-world data to 

support its predictive capacity, is unworthy of 

further consideration. 

proposal for PSS comports well with the 

range established by these agreements, 

in that it rises above the lowest average 

rate (43%) only in the last year of the 

licensing term. Therefore, according to 

Dr. Ford, SoundExchange’s proposal can 

‘‘be presumed to be a reasonable proxy 

for a market outcome.’’ Id. at 16; see also 

6/18/12 Tr. 2831:8–15 (Ford). 

3. Analysis and Conclusions Regarding 

the Proposed Rate Guidance 

Based upon the evidence put forward 

in this proceeding, the Judges conclude 

that neither Music Choice’s nor 

SoundExchange’s proffered rate 

guidance provides a satisfactory 

benchmark upon which they can rely to 

determine the sound recording 

performance royalty rates for the PSS for 

the upcoming license period. The 

parties’ proposals are so far apart, and 

both so far from the current rate, that 

they cannot even be said to describe a 

‘‘zone of reasonableness.’’ The only 

remaining guidance the Judges have 

upon which to base the new rates is the 

current royalty rate of 7.5% of PSS 

Gross Revenues. This rate approximates 

the middle of the wide spectrum 

proposed by the parties. It is the rate 

against which the Judges will test the 

Section 801(b) policy factors. 

a. Music Choice’s Proposed Musical 

Works Guidance 

Having rejected Music Choice’s 

argument that the musical works 

benchmark utilized by the Librarian of 

Congress in PSS–I is binding precedent 

in this proceeding,15 the Judges examine 

the proposed benchmark on its own 

merits and find it lacks comparability to 

the target market. Dr. Crawford, who 

advocates the appropriateness of the 

musical works rates as a benchmark for 

the PSS rates, acknowledges that a 

benchmark market should involve the 

same buyers and sellers for the same 

rights. Crawford Corrected WDT at 24, 

PSS Trial Ex. 4. However, the musical 

works market involves different sellers 

(performing rights societies versus 

record companies) selling different 

rights. See SDARS–I, 73 FR at 4089. The 

fact that a PSS needs performing rights 

to musical works and sound recordings 

to operate its service does not make the 

rights equivalent, nor does it say 

anything about the relative values of 

those rights.16

Music Choice’s reliance on foreign 

rates to support its proffer of the 

musical works guidance is 

unpersuasive. The Judges have 

considered before the significance of 

foreign countries’ treatment of the 

licensing of exclusive rights granted by 

copyright. In the proceeding to set rates 

and terms for the compulsory license to 

reproduce musical compositions under 

Section 115 of the Copyright Act, 

certain participants offered evidence of 

license rates in the U.K., Canada and 

Japan. See Phonorecords I, 74 FR 4510, 

4521 (Jan. 26, 2009). In rejecting the 

foreign rates as comparable benchmarks, 

the Judges stated that ‘‘comparability is 

a much more complex undertaking in an 

international setting than in a domestic 

one. There are a myriad of potential 

structural and regulatory differences 

whose impact has to be addressed in 

order to produce a meaningful 

comparison.’’ Id. at 4522. Neither Mr. 

Del Beccaro nor Dr. Crawford even 

attempts an analysis or discussion of the 

intricacies of Canadian and U.K. 

markets for performance rights for 

musical works and sound recordings, 

and Music Choice itself concedes that 

particular license rates in Canada and 

Europe ‘‘do not necessarily determine 

what the specific market rate in the 

United States should be for the sound 

recording right.’’ Music Choice PFF 

¶ 135. 

Likewise, the Judges are not 

persuaded that Dr. Crawford’s 

application of the Nash Framework 

provides corroboration. The Nash 

Framework is a theoretical concept 

whose goal is to evaluate how the 

surplus from a hypothetical transaction 

might be divided between negotiating 

parties. Even assuming that the Nash 

Framework has predictive value in some 

real-world contexts, Music Choice 

provided no data to support the 

theoretical approximations in the 

market for any intellectual property 

rights, much less those that the Judges 

are charged with evaluating. Therefore, 

the Judges find that the Nash 

Framework is not useful corroborating 

evidence.17

b. SoundExchange’s Marketplace 

Agreements Guidance 

The Judges do not endorse the music 

service benchmarks offered by 

SoundExchange and supported by Dr. 

Ford as persuasive benchmarks. 

Typically the volume (over 2,000) of 

marketplace agreements that Dr. Ford 

examined for music products and 

services would be a sufficiently deep 

sample set to provide a useful 

framework for a marketplace 

benchmark. The four markets Dr. Ford 

examined, however—portable and nonportable subscription interactive 

webcasting, ringtones/ringbacks, and 

digital downloads—involve the 

licensing of products and rights separate 

and apart from the right to publicly 

perform sound recordings in the context 

of this proceeding. The buyers are 

different from the target PSS market; 

thus, the key characteristic of a good 

benchmark—comparability—is not 

present. 

The Judges agree with Dr. Ford’s 

observations that Music Choice has 

several distinct features, such as its 

intermediary role between cable systems 

and subscribers and the bundling of 

Music Choice’s services with multiple 

channels of video and other non-music 

programming, which significantly dim 

the possibility of market comparators. In 

the absence of some rational, reasoned 

adjustment to make the music 

agreements data more comparable to the 

PSS market, the Judges find its 

probative value in this proceeding of 

only marginal value. 

c. The Prevailing Statutory Rate 

The Judges are left, therefore, with a 

consideration of the existing 7.5% 

royalty rate which is the product of 

settlement negotiations that occurred in 

SDARS–I between Music Choice and 

SoundExchange but is a rate for which 

neither party advocates. Although it is 

a rate that was negotiated in the shadow 

of the statutory licensing system and 

cannot properly be said to be a market 

benchmark rate, nothing in the record 

persuades the Judges that 7.5% of Gross 

Revenues, as currently defined, is too 

high, too low or otherwise 

inappropriate. Accord, Phonorecords I, 

74 FR at 4522. 

1. Application of Section 801(b) Factors 

Based on the record evidence in this 

proceeding, the Judges have determined 

that the benchmark evidence submitted 

by Music Choice and SoundExchange 

has failed to provide the means for 

determining a reasonable rate for the 

PSS, other than, perhaps to indicate the 

extreme ends of the range of reasonable 

rates. The testimony and argument of 

Music Choice demonstrates nothing 

more than to show that a reasonable rate 

cannot be as low as the rates (i.e., 

[REDACTED] of Music Choice’s 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23059 

18Much was made in the hearing and in closing 

arguments regarding Dr. Crawford’s supposed use of 

audited financial data and Dr. Ford’s use of 

unaudited financial data in an effort to examine 

costs and revenues of the PSS service vis-a`-vis 

Music Choice’s other non-PSS services. The Judges 

see no superiority to either data set as presented in 

this proceeding. 

19 It is improbable that Music Choice would 

continue to operate for over 15 years with the 

considerable losses that it claims. 

revenues) paid by Music Choice to the 

three performing rights societies for the 

public performance of musical works. 

The benchmark testimony of 

SoundExchange is of even lesser value. 

The proposed rate of 15% for the PSS 

for the first year of the licensing period, 

deemed reasonable by Dr. Ford (at least 

in the beginning of the licensing 

period), stands as the upper bound of 

the range of reasonable rates. Within 

that range is the current 7.5% rate. On 

the record before us, the Judges are 

persuaded that the current rate is 

neither too high, too low, nor otherwise 

inappropriate, subject to consideration 

of the Section 801(b) factors discussed 

below. 

a. Maximize Availability of Creative 

Works 

To argue for an adjustment in its favor 

under the first Section 801(b) factor, 

Music Choice touts that it is a music 

service that is available in over 54 

million homes, with 40 million 

customers using the service every 

month. 8/16/12 Tr. 3878:3 (Del 

Beccaro); 6/11/12 Tr. 1462:5–11, 

1486:19–1487:2 (Del Beccaro). 

According to Music Choice, channel 

offerings have increased through the 

years, and they are curated by experts in 

a variety of music genres. Del Beccaro 

Corrected WDT at 3, 24, PSS Trial Ex. 

1. Music Choice also highlights recent 

developments in technology that enable 

Music Choice to display original onscreen content identifying pertinent 

information regarding the songs and 

artists being performed. Id. at 24, MC 

23; Williams WDT at 12, PSS Trial Ex. 

3; 6/11/12 Tr. 1461:14–1462:1, 1491:2– 

12 (Del Beccaro). According to Music 

Choice, these elements, along with 

certain promotional efforts that Music 

Choice makes on behalf of artists, 

support a downward adjustment in the 

rates. In any event, an upward 

adjustment in the rates, argues Music 

Choice, would not affect the record 

companies’ bottom-line because PSS 

royalties are not a material revenue 

source for record companies. Music 

Choice PFF ¶¶ 409–417. 

SoundExchange submits that a market 

rate incorporates considerations under 

the first Section 801(b) factor, citing the 

decision in SDARS–I, and that if PSS 

rates turn out to be too high and drive 

Music Choice from the market, 

presumably consumers will shift to 

alternative providers of digital music 

where higher royalty payments are more 

likely for record companies. Ford 

Second Corrected WDT at 19–21, SX 

Trial Ex. 79. 

The current PSS rate is not a market 

rate, so market forces cannot be 

presumed to determine the maximum 

amount of product availability 

consistent with the efficient use of 

resources. See SDARS–I, 73 FR 4094. 

However, the testimony demonstrates 

that Music Choice has not, under the 

current rate, reduced its music offerings 

or contemplated exiting the business; in 

fact, it will be expanding its channel 

offerings in the near term. Del Becarro 

Corrected WDT at 3, 24, PSS Trial Ex. 

1; see also 6/11/12 Tr. 1460:21–1461:1 

(Del Beccaro). The Judges find no 

creditable evidence in the record to 

suggest that the output of music from 

record labels has been impacted 

negatively as a result of the current rate. 

The record shows no persuasive 

evidence that a higher PSS royalty rate 

would necessarily result in increased 

output of music by the record 

companies, nor that a lower rate would 

necessarily further stimulate Music 

Choice’s current and planned offerings. 

In sum, the policy goal of maximizing 

creative works to the public is 

reasonably reflected in the current rate 

and, therefore, no adjustment is 

necessary. 

b. Afford Fair Return/Fair Income Under 

Existing Market Conditions 

Music Choice submits that the Judges 

need not worry about the impact of a 

low royalty rate on the fair return to 

record companies and artists for use of 

their works because royalties from the 

PSS market are so small as to be 

virtually inconsequential to companies 

whose principal business is the sale of 

CDs and digital downloads. Music 

Choice PFF ¶¶ 420–430. With respect to 

Music Choice’s ability to earn a fair 

income, however, Music Choice argues 

that it is not profitable under the current 

7.5% rate. Mr. Del Beccaro testified that 

its average revenue per customer for its 

residential audio business has been on 

the decline since the early 1990s, down 

from $1.00 per customer/per month to 

[REDACTED] per customer/per month 

currently. Del Beccaro Corrected WDT 

at 40, PSS Trial Ex. 1. He further 

testified that after 15 years of paying a 

PSS statutory rate between 6.5% and 

7.5% Music Choice has not become 

profitable on a cumulative basis and is 

not projected to become so within the 

foreseeable future. Id. at 42. Music 

Choice represents that it has a 

cumulative loss at the end of 2011 of 

[REDACTED], projected to grow to 

[REDACTED] in 2012 and continue to 

increase throughout the 2013–17 license 

period. Del Beccaro Corrected WRT at 

MC 69 at 1 and MC 70 at 1, PSS Trial 

Ex. 21. These losses lead Music Choice 

to conclude that it has not generated a 

reasonable return on capital under the 

existing rates. Music Choice PFF 

¶¶ 442–43. 

Music Choice’s claims of 

unprofitability under the existing PSS 

rate come from the oblique presentation 

of its financial data and a combining of 

revenues and expenses from other 

aspects of its business. The appropriate 

business to analyze for purposes of this 

proceeding is the residential audio 

service offered by Music Choice, the 

subject of the Section 114 license. Music 

Choice, however, reports costs and 

revenues for its residential audio 

business with those of its commercial 

business, which is not subject to the 

statutory license. This aggregation of the 

data, which Music Choice acknowledges 

cannot be disaggregated, see 6/11/12 Tr. 

1572:3–1576:2 (Del Beccaro), masks the 

financial performance of the PSS 

business. As a consolidated business, 

Music Choice has had significantly 

positive operating income between 2007 

and 2011 and made profit distributions 

to its partners since 2009. Ford 

Amended/Corrected WRT at SX Ex. 

362–RR, p. 3 (PSS_002739), SX Trial Ex. 

244; SX Trial Ex. 64 at 3 (PSS_002715); 

SX Trial Ex. 233 at 3 (PSS_366020). Dr. 

Crawford’s effort to extract costs and 

revenues from this data for the PSS 

service alone for use in his surplus 

analysis cannot be credited because of 

his lack of familiarity with the data’s 

source. 6/13/12 Tr. 1890:15–1891:10 

(Crawford).18 The Judges find no 

persuasive evidence to suggest that 

Music Choice has not operated 

successfully and received a fair income 

under the existing statutory rate.19

With respect to fair return to the 

copyright owner, the Judges’ 

examination is whether the existing 

statutory rate has produced a fair return 

with respect to the usage of sound 

recordings. During the current licensing 

period, Music Choice provided 46 

channels of music programming. Music 

Choice plans to expand the number of 

music channels it provides dramatically 

in the coming licensing term, however, 

up to 300 channels by the first quarter 

of 2013. Del Beccaro Corrected WDT at 

3–4, PSS Trial Ex. 1; 6/11/12 Tr. 

1490:8–16 (Del Beccaro). This 

expansion will result in a substantial 

increase in the number of plays of music 

by Music Choice, even if the ultimate 

mstockstill on DSK4VPTVN1PROD with RULES3

23060 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

listenership intensity of its licensees’ 

subscribers cannot be measured. Music 

Choice provided no evidence, however, 

to suggest that the planned expansion in 

usage would result in increased 

revenues to which the statutory royalty 

rate is to be applied. Indeed, Music 

Choice has declared itself to be in a 

mature market with no expectation of 

increasing profits. 8/16/12 Tr. 3855:17– 

3856:7 (Del Beccaro). 

Music Choice presented no evidence 

to suggest that copyright owners would 

be compensated for the increased usage 

of their works. Dramatically expanded 

usage without a corresponding 

expectation of increased compensation 

suggests an upward adjustment to the 

existing statutory rate is warranted. 

Measurement of the adjustment is not 

without difficulty because any 

downstream increases in listenership of 

subscribers as a result of additional 

music offerings by Music Choice cannot 

be readily predicted. It is possible that 

listenership overall may remain 

constant despite the availability of 

several additional music channels. It is 

more likely, however, that Music Choice 

would not make the expansion, and 

incur the additional expense of doing 

so, without reasonable expectation that 

subscribers or advertisers would be 

more attracted to the expanded 

offerings, although the Judges have no 

evidence to suggest that the net increase 

in listenership (or advertising revenue) 

would be anything more than modest. 

SoundExchange refers to prior rate 

decisions and the application of the fair 

return/fair income factor by the Judges 

and their predecessors. SoundExchange 

asserts that the Judges are looking for a 

fair return/fair income result that is 

consistent with reasonable market 

incomes. SX PFF at ¶ 491, citing 

SDARS–1, 73 F.R. 4080, 4095 (Jan. 24, 

2008). Referring to testimony by Messrs. 

Ciongoli and Van Arman, 

SoundExchange emphasizes how vital 

statutory royalty income is to copyright 

owners—both the record labels and the 

artists, whose share SoundExchange 

distributes directly. See 6/13/12 Tr. 

2138:5–2142:9 (Ciongoli), Van Arman 

WDT at 4, SX Trial Ex. 77. Although the 

income from any one statutory license 

may not be great, SoundExchange cites 

the aggregate value of income from all 

of the statutory licenses as vital to the 

industry. With respect to fair income to 

the rights user, SoundExchange points 

to the profit on the consolidated 

financial statements of Music Choice 

over the past five years, 2007–2011. 

The balance of fair return and fair 

income appears to have been 

maintained at the current PSS rates. 

This factor does not argue in favor of 

drastic cuts or increases in the current 

rate. Music Choice’s planned increase in 

usage, however, argues in favor of an 

increase in the rates going forward to 

fairly compensate the licensors for the 

additional performances. 

The Judges determine, therefore, that 

a 1% upward adjustment of the 

benchmark (from 7.5% to 8.5% of Gross 

Revenues), phased in during the early 

part of the licensing period, is 

appropriate to serve the policy of fair 

return/fair income. 

c. Weigh the Relative Roles of Copyright 

Owners and Copyright Users 

This policy factor requires that the 

rates the Judges adopt reflect the relative 

roles of the copyright owners and 

copyright users in the product made 

available with respect to relative 

creative contribution, technological 

contribution, capital investment, cost, 

risk, and contribution to the opening of 

markets for creative expression and 

media for their communication. Music 

Choice argues that its creative and 

technological contributions, and capital 

investments, outweigh those of the 

record companies. First, Music Choice 

touts the graphic and informational 

improvements made to its on-screen 

channels, noting that what were once 

blank screens now display significant 

artist and music information. According 

to Music Choice, costs for these 

improvements have exceeded 

[REDACTED]. Del Beccaro Corrected 

WDT at 31–32, PSS Trial Ex. 1. Second, 

Music Choice offers increases in 

programming, staff size and facilities, 

along with enhancements to product 

development and infrastructure. Music 

Choice estimates that costs for these 

improvements have exceeded 

[REDACTED]. Id. Regarding costs and 

risks, Music Choice points to its lack of 

profitability and the exit of other PSS 

from the market as evidence of its 

continued risk and limited opportunity 

for profit. Music Choice PFF ¶¶ 512– 

520. Finally, with respect to opening 

new markets, Music Choice touts the 

PSS market itself for which it remains 

the standard-bearer in disseminating 

music to the public through cable 

television. Id. at ¶ 523. 

SoundExchange offers little more on 

the third Section 801(b) factor beyond 

Dr. Ford’s contention that he saw no 

evidence to support that Music Choice 

makes contributions to creativity or 

availability of music that are beyond 

those of the music services he included 

in his benchmarks, and therefore, 

according to Dr. Ford, the third factor is 

accounted for in the market. Ford 

Second Corrected WDT at 21, SX Trial 

Ex. 79; 6/18/12 Tr. 2849:10–16 (Ford). 

In considering the third factor, the 

Judges’ task is not to determine who 

individually bears the greater risk, 

incurs the higher cost or makes a greater 

contribution in the PSS market, and 

then make individual up or down 

adjustments to the selected rate based 

upon some unspecified quantification. 

Rather, the consideration is whether 

these elements, taken as a whole, 

require adjustment to the Judges’ 

selected benchmark rate of 7.5%. Upon 

careful weighing of the evidence, the 

Judges determine that no adjustment is 

necessary. Music Choice’s investments 

in programming offerings, staff, and 

facilities, and other related products and 

services are no doubt impressive, but 

they have been accomplished under the 

current rate. As discussed above, Music 

Choice has already begun to expand its 

channel offerings and has allocated 

greater financial resources to its 

residential audio business. All of these 

undertakings, plus the investments 

made and costs incurred to date have 

been made under the existing rate, and 

the Judges have no persuasive evidence 

to suggest that these contributions have 

not been accounted for in the current 

rate. On the other side of the ledger, 

SoundExchange has not offered any 

persuasive evidence that the existing 

rate has prevented the music industry 

from making significant contributions to 

or investments in the PSS market or that 

those contributions are not already 

accounted for in the current rate. 

Therefore, no adjustment is warranted 

under this factor. 

d. Minimize Disruptive Impact 

Of the four Section 801(b) factors, the 

parties devoted most of their attention 

to the last one: Minimizing disruption 

on the structure of the industries and on 

generally prevailing industry practices. 

This is perhaps not surprising, given the 

role this factor played in SDARS–I in 

adjusting the benchmark rates upon 

which the Judges relied to set the 

royalty fees. See SDARS–I, 73 FR at 

4097–98. Because the Judges have 

identified as reasonable the rate for PSS 

currently in place, the Judges’ analysis 

of the disruption factor is confined to 

that rate. 

SoundExchange argues that the 

current rate is disruptive to the music 

industry. Dr. Ford testified that ‘‘the 

current practice of applying an 

exceedingly low rate to deflated 

revenues is disruptive of industry 

structure, especially where there are 

identical services already paying a 

higher rate.’’ Ford Second Corrected 

WDT at 23, SX Trial Ex. 79. This results, 

according to Dr. Ford, in a tilting of the 

competitive field for music services in 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23061 

favor of Music Choice, thereby 

disrupting the natural evolution of the 

music delivery industry. Dr. Ford, 

however, concedes that the PSS market 

has unique and distinctive features that 

distinguish it from other types of music 

services, thereby substantially reducing 

the likelihood that the PSS and other 

music services would be viewed as 

substitutes for one another. Further, Dr. 

Ford failed to present any empirical 

evidence demonstrating a likelihood of 

migration of customers from music 

services paying higher royalty fees to 

the PSS as a result of his perceived 

royalty imbalance. Dr. Ford’s conclusion 

that the current rate paid by the PSS for 

the Section 114 license has caused a 

disruption to the music industry (or 

would likely do so in the upcoming 

license period) is mere conjecture. 

Music Choice also contends that the 

current rate is disruptive. The Judges 

find its argument weak and 

unsubstantiated. The test for 

determining disruption to an industry, 

announced by the Judges in SDARS–I, is 

whether the selected rate directly 

produces an adverse impact that is 

substantial, immediate, and irreversible 

in the short-run. SDARS–I, 73 FR at 

4097. The current rate has been in place 

for some time and, despite Music 

Choice’s protestations that it has never 

been profitable, it continues to operate 

and continues to increase its 

expenditures by expanding and 

enhancing its services in the face of the 

supposedly disruptive current royalty 

rate. Music Choice’s argument that 

DMX’s bankruptcy and Muzak’s 

decision to limit its participation in the 

PSS market are evidence of the onerous 

burden of the current rate are without 

support. Music Choice has failed to put 

forward any evidence demonstrating a 

causal relationship between the actions 

of those services and the current PSS 

royalty rate. In sum, the Judges are not 

persuaded by the record testimony or 

the arguments of the parties that the 

current PSS rate is disruptive to a 

degree that would warrant an 

adjustment, either up or down. 

2. The Judges’ Rate Determination for 

PSS 

In light of the Judges’ analysis of the 

Section 801(b) factors, the Judges set 

forth the following PSS rates: for 2013: 

8.0%; for 2014: 8.5%; for 2015: 8.5%; 

for 2016: 8.5%; and for 2017: 8.5%. 

The Judges have chosen to phase-in 

the increase over the first two years of 

the license period to moderate any 

potential negative impact the rate 

increase might have on the PSS. Should 

Music Choice alter its anticipated usage 

under the statutory license in the future, 

such evidence can be taken into account 

in a future rate proceeding; however, the 

Judges received no evidence that 

suggests that Music Choice’s channel 

line-up, once expanded in 2013, will 

shrink considerably during the license 

period. 

In addition to proposing rates, 

SoundExchange raises an additional 

matter. Though not technically a rate, 

nor strictly an amendment of the Gross 

Revenues definition as it applies to PSS, 

SoundExchange requests a means for 

capturing revenues from cable systems 

that are owners of equity or capital 

interests in Music Choice who do not 

engage in arm’s length transactions with 

Music Choice for its product offerings. 

Second Revised Proposed Rates and 

Terms of SoundExchange, Inc., at 6–7 

(Sept. 26, 2012). Put another way, 

SoundExchange seeks to capture any 

price breaks that Music Choice offers its 

affiliates for the Music Choice service. 

The proposed price adjustment for 

affiliated cable systems would be 

calculated by multiplying the total 

number of subscribers for the month for 

each affiliated cable system by the 

average per-subscriber royalty payment 

of the five largest paying unaffiliated 

cable systems that provide the Music 

Choice service. These adjustments 

would then be added to Music Choice’s 

Gross Revenues. In support of its ‘‘Non 

Arm’s Length Transaction’’ adjustment 

for affiliated cable systems, Dr. Ford 

testified that a straight percentage-ofrevenue metric would not adequately 

account for the situation where Music 

Choice offers per-subscriber rate 

discounts to its cable partners. 8/20/12 

Tr. 4216:21–4217:8 (Ford). According to 

Dr. Ford, over half of Music Choice’s 

non-partner cable systems pay 

approximately [REDACTED] per 

subscriber per month in licensing fees to 

Music Choice, whereas the partner cable 

systems pay only [REDACTED] per 

subscriber per month. Ford Amended/ 

Corrected WRT at 5, SX Trial Ex. 244. 

The Judges are not persuaded that a 

‘‘Non Arm’s Length Transaction’’ 

adjustment is warranted. It is not 

surprising that the affiliated cable 

operators, which in most instances have 

more subscribers than the non-affiliated 

systems, would be able to negotiate 

lower per-subscriber licensing fees due 

to their ability to deliver more 

subscribers to the service. Therefore, the 

differences in subscriber fees between 

affiliates and non-affiliates could be 

unrelated to the operator’s status vis-a`- 

vis Music Choice. Further, the affiliated 

cable systems represent a third of Music 

Choice ownership whereas Music 

Choice’s record company partners own 

one quarter of the company. 6/11/12 Tr. 

1454:16–22 (Del Beccaro). Therefore, it 

is not unreasonable to assume that the 

record label owners would serve as a 

counterweight to the affiliated cable 

systems. Therefore, the Judges conclude 

that on the current record, any influence 

on subscriber rates from the competing 

stakeholders of Music Choice, if any, 

would be a wash. 

B. Section 114 Royalty Rates for SDARS 

SoundExchange proposes the 

following percentage of revenue rates 

for SDARS: 12% for 2013; 14% for 2014; 

16% for 2015; 18% for 2016; and 20% 

for 2017. Second Revised Rates and 

Terms of SoundExchange, Inc., at 2 

(Sept. 26, 2012). Sirius XM counters 

with a proposed royalty rate in the range 

of 5% to 7% of Sirius XM’s monthly 

U.S. gross revenues. Proposed Rates and 

Terms of Sirius XM Radio, Inc., at 4 

(Sept. 26, 2012). 

1. Sirius XM’s Proposal 

a. Direct License Benchmark 

Beginning in 2010, Sirius XM 

commenced a coordinated effort to 

negotiate sound recording performance 

rights directly with individual record 

labels. Sirius XM first attempted to 

engage the four major record companies 

in discussions but was unsuccessful. Id.; 

6/7/12 Tr. 669:8–672:9, 713:3–11, 

714:11–715:4 (Frear); 6/11/12 Tr. 

1347:7–21, 1348:20–1349:4 (Karmazin). 

Sirius XM then enlisted Music Reports, 

Inc. (‘‘MRI’’) to formulate and execute a 

direct licensing strategy with as many 

independent record labels as possible. 

Together, Sirius XM and MRI developed 

the terms and conditions of a template 

Direct License, key provisions of which 

include: 

• A pro rata share of 5%, 6%, or 7% 

of gross revenues, defined by reference 

to 37 CFR 382.11; 

• A grant of rights to Sirius XM to 

operate all of its various services 

(satellite radio plus other services such 

as webcasting); 

• ‘‘Additional functionality’’ granted 

to Sirius XM, including elimination of 

the Section 114 license sound recording 

performance complement, which allows 

Sirius XM to play more music from a 

particular artist in a given period of 

time; 

• Direct, quarterly payment of 100% 

of the royalties to the record label; 

• Payment of advances to the 5 largest 

record labels; and 

• The possibility, but not the 

promise, of increased play on Sirius 

XM’s music services. 

Gertz Corrected WDT at 8–11, SXM 

Dir. Trial Ex. 14; Gertz Revised WRT at 

2, SXM Reb. Trial Ex. 8; 6/8/2012 Tr. 

mstockstill on DSK4VPTVN1PROD with RULES3

23062 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

20Sirius XM devoted considerable energy in this 

proceeding to discovery and presentation of 

evidence regarding actions by SoundExchange and 

its member record labels relating to the Direct 

Licensing initiative. Sirius XM contends that it 

would have been able to present a much greater 

number of Direct Licenses but for the interference 

of SoundExchange. In a rate determination 

proceeding, the Judges cannot adjudicate claims of 

tortious interference with contractual relations or 

business expectancies. Indeed, Sirius XM never 

presented such claims to the Judges for 

adjudication. Those claims can only be adjudicated 

in a court of competent jurisdiction. Had Sirius XM 

been able to make a sufficient showing that actions 

by SoundExchange were in fact interfering with the 

validity of this rate determination proceeding, then 

the Judges would have had to decide what effect, 

if any, such interference might have had on the 

validity of these rate proceedings. The Judges 

allowed evidence in this proceeding only to 

determine whether, and to what extent, any activity 

by either party might have skewed the evidence 

upon which the Judges must rely. 

21 Dr. Noll also examined similar agreements 

between major labels and the music services 

Slacker and Turntable. 

22Examining these same agreements for Last.fm’s 

interactive on-demand service—[REDACTED]—led 

Dr. Noll to conclude that sound recording rights 

owners charge [REDACTED] for non-interactive 

services than they do for interactive/on-demand 

services. Dr. Noll also found similar rate 

differentials in the [REDACTED]. Noll Revised 

Amended WDT at 76–79, Tables 2.2–2.2d and 

Appendices I–K, SXM Dir. Trial Ex. 1. 

23The ‘‘greater of’’ metric is an amount per play, 

an amount per subscriber, or a percentage of the 

service’s revenues. 6/14/12 Tr. 2261:7–2262:4 

(Ordover). 

986:20–987:5 (Blatter). Sirius XM 

executed the first Direct Licenses in 

August of 2011 and by the time of the 

closing of testimony in this proceeding, 

Sirius XM had Direct Licenses with 95 

independent record labels that set a 

royalty rate of between 5% and 7% of 

gross revenues, depending on the 

particular agreement. 8/13/12 Tr. 

3015:16–20 (Frear); 8/15/12 Tr. 

3679:22–3680:1 (Gertz). 

b. The Noll Analysis 

Sirius XM’s expert economist, Dr. 

Roger Noll, contends that the 95 Direct 

Licenses are the best benchmark for 

SDARS rate setting in this proceeding 

because, unlike in SDARS–I, the Judges 

now have direct evidence of 

competitively negotiated marketplace 

rates for the exact service at issue in this 

proceeding. Noll Revised Amended 

WDT at 7, 11, 33–36, SXM Dir. Trial Ex. 

1. Dr. Noll testified that the Direct 

Licenses are representative, for 

benchmarking purposes, of the types of 

sound recordings available across the 

industry, including those distributed by 

major record labels. Id. at 39–45; see 

also 6/5/12 Tr. 261:6–262:14 

(Noll)(contending that the 95 Direct 

Licensors as a group offer a scope of 

sound recordings comparable to those 

not so licensed). 

Dr. Michael Salinger, another Sirius 

XM expert economist, concludes that 

the fact that 95 record companies 

accepted the Direct License offer 

suggests that the current 8% statutory 

rate is, if anything, above the 

competitive rate for sound recordings. 

Salinger Corrected WRT at 13, SXM 

Reb. Trial Ex. 9. Further, Sirius XM 

argues that the number of Direct 

Licenses undoubtedly would have been 

higher but for the efforts of 

SoundExchange, the American 

Association of Independent Musicians 

and others to undermine and interfere 

with its Direct License Initiative.20 See, 

e.g., Sirius XM PFF¶¶ 116–120. 

Dr. Noll asserts that license 

agreements between major record labels 

and certain customized non-interactive 

webcasters provide marketplace 

evidence of rates that corroborate the 

5%–7% rates achieved in the Direct 

Licenses. Noll Revised Amended WDT 

at 16, SXM Dir. Trial Ex. 1. Focusing 

principally on the sound recording 

rights agreements between the digital 

music service Last.fm and the four 

major record labels,21 Dr. Noll 

determined that for its non-interactive 

subscription streaming service, Last.fm 

agreed to pay: 

• [REDACTED] 

• [REDACTED] 

• [REDACTED] 

Id. at 76–79 (footnote omitted), Tables 

2.1–2.1c and Appendices E–H.22

Using the rates gleaned from the 

Last.fm agreements for the noninteractive subscription streaming 

service, which he deemed to be the most 

similar to Sirius XM’s satellite radio 

service in terms of functionality, Dr. 

Noll computed a hypothetical royalty 

rate by multiplying the Last.fm 

percentage-of-revenue rates 

[REDACTED] by the implicit persubscriber price for Sirius XM’s music 

channels ($3.00–$3.45). Dr. Noll then 

divided the resulting per subscriber 

monthly fee by Sirius XM’s average 

revenue per user ($11.38) to express the 

hypothetical royalty rates as a 

percentage of revenue. Id. at 15; 6/5/12 

Tr. 285:7–293:9 (Noll). This yielded an 

average royalty rate as a percentage of 

Sirius XM music channel revenue of 

6.76%. Id. at 90; 6/5/12 Tr. 293:5–9 

(Noll). Because this hypothetical rate fit 

squarely within the 5%–7% rate range 

of the Direct Licenses, Dr. Noll opines 

that the Last.fm agreement rates are 

corroborative of the rates contained in 

the Direct Licenses. He further 

concludes that the range of rates in the 

Direct Licenses represent the upper end 

of a reasonable royalty rate because the 

customized, non-interactive Last.fm 

services offer greater functionality and 

sound quality than the channels offered 

by Sirius XM. Id. at 14–16; 6/5/12 Tr. 

292:2–14 (Noll). 

2. SoundExchange Proposed 

Benchmarks 

SoundExchange’s expert economist, 

Dr. Janusz Ordover, offers a principal 

benchmark, and two alternatives, based 

upon his examination of seven market 

agreements for digital music between 

certain interactive subscription services 

that stream music over the Internet and 

each of the four major record labels. Dr. 

Ordover chose interactive subscription 

services because of his belief that they 

represent voluntary transactions in a 

competitive marketplace free of 

regulatory overhang. He also opined that 

such transactions provide sufficient 

information based on multiple buyer/ 

seller interactions, are not distorted by 

the exercise of undue market power on 

either the buyer’s or seller’s side, and 

involve digital music services that are 

similar to Sirius XM. 6/14/12 Tr. 

2359:11–2360:9, 2256:13–2261:3 

(Ordover). 

a. Ordover’s Interactive Streaming 

Benchmark 

Dr. Ordover derived his principal 

interactive streaming benchmark by 

determining the percentage of revenues 

that streaming services paid to the major 

record labels pursuant to their 

respective agreements. He then 

multiplied that percentage by an 

estimated retail price for a hypothetical 

music-only satellite radio service. See 

generally Ordover Third Corrected/ 

Amended WDT at 18–25, SX Trial Ex. 

74. Beginning with data from July 2010, 

he derived the effective percentage of 

revenue paid by each interactive service 

by taking the amount of royalty fees 

paid to the record companies and 

dividing it by each service’s gross 

subscription revenues. 6/14/12 Tr. 

2274:10–16 (Ordover). In other words, 

Dr. Ordover relied on royalty payments 

the labels reportedly received under the 

agreements rather than the percentageof-revenue rates specified in the 

agreements which contained ‘‘greater 

of’’ royalty formulations.23 6/14/12 Tr. 

2274:22–2275:1, 2363:14–2364:7 

(Ordover). In calculating actual 

licensing fees paid, Dr. Ordover used 

gross subscription revenues of the 

interactive services without any 

deductions or carve-outs. Ordover Third 

Corrected/Amended WDT at 19, SX 

Trial Ex. 74. Examining the agreements, 

he determined that the annual payments 

as a percentage of gross subscription 

revenues of the services ranged from 

50% to 70%, and tended to cluster in 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23063 

24 Dr. Ordover’s mathematical calculation is as 

follows: He took the $12.95 Sirius XM subscription 

price, and then multiplied that by 50% to obtain the 

music portion of the subscription price of $6.475. 

He then multiplied the music-only satellite radio 

subscription price by 60% to 65% (his effective 

percentage of royalty derived from the interactive 

subscription service agreements) to obtain the 

music royalty of $3.88 to $4.21. Finally, he divided 

those numbers by the Sirius XM subscription price 

for the Select programming package to obtain the 

30% to 32.5% range. 8/16/12 Tr. 3794:13–3795:9 

(Salinger). 

25The current price for this service is $14.49. 

Ordover Third Corrected/Amended WDT at 31 n.33, 

SX Trial Ex. 74. 

26 Dr. Ordover did not provide a weighted average 

of the non-interactive service prices because he 

concluded that he did not have reliable data, nor 

did he include, at the Judges’ invitation, adsupported non-interactive services in his 

calculation, deciding that such services would add 

undue complexity to his methodology. Ordover 

Amended WRT at 38–39, SX Trial Ex. 218. 

27This rate was calculated by multiplying the 

interactivity ratio of .4865 ($4.86/$9.99) by the 

average per-subscriber royalty payment of $5.95, 

yielding an equivalent satellite radio payment of 

$2.89. The $2.89 per-subscriber rate was then 

divided by the $12.95 monthly charge for the Sirius 

XM Select satellite radio package, resulting in the 

percentage of revenue rate of 22.32%. 

28 Dr. Ordover estimated that the works licensed 

under the Direct Licenses represent no more than 

2%–4% of the total number of works performed by 

Sirius XM. Ordover Amended WRT at 4–5, SX Trial 

Ex. 218; 6/6/12 Tr. 308:3–5 (Noll). 

a range of 60% to 65%. Id. at 19–21; 6/ 

14/12 Tr. 2275:4–12 (Ordover). 

Dr. Ordover then attempted to 

account for the fact that the Sirius XM 

satellite radio service, unlike interactive 

subscription services, transmits both 

music and non-music content by 

reducing the percentage-of-revenue rate 

from the interactive subscription 

agreements by half. He chose this 

reduction percentage principally based 

upon his observation of the identical 

$9.99 retail prices offered by Sirius XM 

for non-music and mostly music standalone subscriber packages. The result 

was a percentage-of-revenue rate range 

of between 30% and 32.5%. Dr. Ordover 

proposed this range as a benchmark for 

the SDARS rates for the 2013–17 

statutory licensing period. Ordover 

Third Corrected/Amended WDT at 17, 

SX Trial Ex. 74.24

b. Ordover’s Content Comparability 

Adjustment 

Dr. Ordover offered an alternative 

approach that involved an examination 

of per-subscriber royalty rates from 

interactive music streaming 

subscription services in an effort to 

adjust for the differences in service 

attributes between satellite radio and 

interactive subscription services. He 

first determined an unweighted average 

monthly royalty of $5.95 per subscriber 

(monthly licensing fees paid divided by 

monthly subscriber counts) for 

interactive subscription services. He 

then adjusted this fee by the ratio of the 

retail price of a hypothetical music-only 

satellite radio service (50% of the 

$12.95 subscription price for the Sirius 

XM Select programming package 25) to 

the retail price for interactive 

subscription services ($9.99). Ordover 

Third Corrected/Amended WDT at 30– 

31, SX Trial Ex. 74. This percentage, 

when applied to the average persubscriber royalty paid by interactive 

services ($5.95), yields $3.86 for the 

hypothetical music-only satellite radio 

service. Dividing this number by the 

$12.95 Sirius XM subscription price 

provides a percentage-of-revenue rate of 

29.81%. Id. at 32. 

c. Ordover’s Interactivity Adjustment 

Dr. Ordover’s second alternative 

approach attempts to adjust for the 

presence of interactivity alone in the 

rates yielded by his primary benchmark 

under the assumption that interactivity 

is the material difference between 

interactive subscription services and 

satellite radio. Ordover Third Corrected/ 

Amended WDT at 33, SX. Trial Ex. 74. 

To derive the value of interactivity, he 

compared the retail prices for 

interactive music streaming services 

with the retail prices for non-interactive 

music streaming services. He 

determined that interactive music 

streaming services are uniformly priced 

at $9.99 per month, while noninteractive services prices averaged 

$4.86. Id. at 31–32, Table 4 and 33–34, 

Table 5.26 Dr. Ordover then used the 

ratio to adjust the average per-subscriber 

royalty paid by interactive services 

($5.95) to calculate an equivalent 

payment for satellite radio. This 

calculation yielded a percentage-ofrevenue royalty rate of 22.32% for Sirius 

XM, which Dr. Ordover concludes 

represents the lower bound of a 

reasonable royalty rate. 6/14/12 Tr. 

2282:12–2283:22, 2334:8–11 

(Ordover).27 Dr. Ordover offered no 

alternative that attempted to account for 

the combination of content and 

interactivity differences. 

3. Analysis and Conclusions Regarding 

the Proposed Benchmarks 

For the reasons stated herein, the 

Judges determine that an analysis of the 

benchmark evidence presented in this 

proceeding establishes that reasonable 

royalty rates for the use of sound 

recordings under the Section 114 

statutory license cannot be lower than 

7%, the upper bound of the range of 

rates of the Direct Licenses. The Judges 

find that Dr. Ordover’s proposed 

benchmark rates of between 30%– 

32.5% are beyond the zone of 

reasonableness, given that they are four 

times greater than the rate of 8% that 

the Judges set four years ago in SDARS– 

I and are based on a limited data set of 

questionable comparability to the target 

market. As a result, the Judges are left 

with no acceptable benchmark by which 

to mark an upper bound for a zone of 

reasonableness. The Judges rely, 

therefore, on data points such as the 

lowest rate proposed by SoundExchange 

and the unadjusted upper bound in 

SDARS–I to guide the determination of 

what the upper bound should be in this 

proceeding. 

a. Analysis of Sirius XM’s Proposed 

Direct License Benchmark 

The Direct Licenses that Sirius XM 

proposed as the foundation for a 

benchmark have the surface appeal of a 

comparable benchmark because they 

involve the same sellers and buyers as 

the target market. A closer examination, 

however, reveals the weaknesses of the 

Direct Licenses as a data set. First, the 

direct licensors represent a sliver of the 

universe of rights holders for sound 

recordings: 95 of over 20,100 rights 

holders to which SoundExchange 

distributes payments. See Bender WDT 

at 4, SX Trial Ex. 75; 8/13/12 Tr. 

3015:16–20 (Frear). They also represent 

a subset of the 691 independent labels 

that Sirius XM approached in the first 

instance. Ordover Amended WRT at 4 

n.8, SX Trial Ex. 218; SX Trial Ex. 301. 

Sirius XM opined that the number of 

Direct Licenses would likely have been 

substantially higher but for the alleged 

interference of SoundExchange and 

others who purportedly attempted to 

discourage record labels from 

negotiating with Sirius XM. The Judges 

are not persuaded by the evidence in the 

record that SoundExchange’s alleged 

actions materially frustrated Sirius XM’s 

efforts to execute Direct License 

agreements. Therefore, the Judges must 

evaluate the Direct Licenses for what 

they are, which is to say, a very small 

subset of the sound recording market.28

The Direct Licenses do not include 

any of the major record labels whom, by 

virtue of the depth and breadth of their 

music catalogues, make up a critical 

portion of the sound recording market. 

Dr. Noll’s observation that the works 

licensed by the Direct Licensors 

represent the kinds of sound recordings 

performed on Sirius XM does not 

diminish the importance of the 

catalogues of the major labels. It would 

be difficult to imagine a successful 

SDARS service that did not have access 

to the types of recordings that the major 

mstockstill on DSK4VPTVN1PROD with RULES3

23064 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

29The Judges recognize that direct payment to the 

Direct Licensors does not relieve them of their 

royalty obligations to their artists and performers; 

however, receipt of 100% of the royalties upfront 

is clearly attractive to certain record labels and was 

a selling point in negotiations with independent 

record labels. Powers WDT at 4–5, SX Trial Ex. 243. 

30The implicit monthly price is applied to the 

effective percentage of revenue rate of [REDACTED] 

from the Last.fm agreements that serve as the 

numerator in Dr. Noll’s calculation. 

labels possess. The ‘‘representativeness’’ 

of the sound recordings contained in the 

catalogues of the Direct Licensees does 

not equate to their popularity, an 

essential ingredient to Sirius XM’s 

music offerings. 6/7/12 Tr. 836:17–22 

(Gertz)(‘‘Sirius XM is very hits driven, 

and they want to have the most 

successful service they can, so they’re 

going to use what’s popular.’’). 

Nevertheless, the rates the Judges set 

must evaluate the universe of sound 

recordings available for licensing under 

the statute. The vast majority of those 

sound recordings would not currently 

be considered to be ‘‘popular,’’ although 

many might have qualified as ‘‘hits’’ in 

their day or are viewed as popular in a 

particular genre. 

Furthermore, the Judges note that the 

additional considerations and rights 

granted in the Direct Licenses that are 

beyond those contained in the Section 

114 license weaken the Direct Licenses’ 

comparability as a benchmark. For 

example, the Direct Licenses provide for 

payment of 100% of the royalties to the 

Direct Licensors, 6/6/12 Tr. 341:10– 

342:3 (Noll), thereby avoiding the 

statutory apportionment of 50% to 

record companies and 50% to artists 

and performers.29 See 17 U.S.C. 114(g). 

Certain of the Direct Licenses, in 

particular those of the larger 

independent labels, provide for cash 

advances and accelerated royalty 

payments, considerations that also are 

not provided for under the statutory 

license. See, e.g., Gertz Revised WRT at 

SXM Reb. Ex. 8, pp. 3–4 and SXM Reb. 

23, pp. 3–4, SXM Reb. Trial Ex. 8. In 

addition, Sirius XM absorbs all of the 

administrative costs of the licensing 

process under the Direct Licenses, 

which, under the statutory license, are 

borne by the copyright owners, artists 

and performers. Eisenberg Amended/ 

Corrected WRT at SX Ex. 313–RR, SX 

Trial Ex. 245. With respect to rights 

granted under the Direct Licenses, 

Sirius XM receives a waiver of the 

sound recording complement of the 

statutory license and the ability to 

perform the works of the Direct 

Licensors on other services not covered 

by the statutory license. 

Dr. Noll’s analysis does little to 

address the Judges’ concerns regarding 

the Direct Licenses. Dr. Noll contends 

that the fact the Direct License rates are 

lower than the current 8% statutory rate 

is explained by a ‘‘demand diversion 

effect.’’ In other words, Dr. Noll posits 

that record labels engage in price 

competition aimed at increasing their 

market share through increased plays on 

Sirius XM, thereby reducing the royalty 

rates demanded, which reflects what 

would happen in the market as a whole 

in the absence of a statutory rate. Noll 

Revised Amended WDT at 36–38, SXM 

Dir. Trial Ex. 1. 

Dr. Noll’s demand diversion theory, 

however, has limited explanatory 

power. It may well be that independent 

record labels took the Direct License 

offer because of the valuable nonstatutory benefits discussed above, and 

there is testimony in the record to this 

effect. See, e.g., SX Trial Ex. 317 at 

SXM–CRB_DIR_00079565; 8/20/12 Tr. 

4156:5–4157:3 (Powers). Further, 

independent labels may have a greater 

incentive than majors to secure 

performances of their works on services 

such as Sirius XM, which would 

increase the attractiveness of a Direct 

License relationship. Powers WRT at 4, 

SX Trial Ex. 243; Eisenberg Amended/ 

Corrected WRT at SX Ex. 329–RR at 

SXM_CRB_DIR_00042287, SX Trial Ex. 

245 (email from MRI to independent 

label emphasizing that a Direct License 

offers the possibility of increased 

airplay). Although major labels also 

must compete with other majors and 

with independent labels for airplay, 

none was apparently so motivated by 

that concern to negotiate separately with 

Sirius XM. Therefore, the differing 

motivations of the ‘‘sellers’’ in the 

proposed Direct License benchmark 

suggest a weakness regarding 

comparability to the target market. 

Dr. Noll’s benchmark analysis, 

whether considered as corroboration of 

the rates in the Direct Licenses or 

standing alone, contains significant 

flaws. His reliance on the Last.fm 

agreements with the four major record 

labels, which provide the critical data to 

his calculations, is valid to the extent 

that the agreements are shown to be 

representative of non-interactive 

subscription webcasting services. See 

SDARS–I, 73 FR at 4090. Two of the 

agreements, however, have expired and 

are no longer in effect. Ordover 

Amended WRT at 25, SX Trial Ex. 218. 

Last.fm now pays those record 

companies at the statutory webcasting 

rate, which is not a market rate. 8/14/ 

12 Tr. 3308:8–20, 3317:10–16 (Ordover). 

Even if the Last.fm agreements were the 

most representative of webcasting 

services—and Dr. Noll has not 

demonstrated that they are—the Judges 

would not be inclined to accept them as 

fully comparable to the SDARS business 

without a persuasive adjustment to 

account for the functional differences 

between webcasting and satellite radio. 

Dr. Noll offered none. 

The Judges also have reservations 

about Dr. Noll’s determination of $3.00– 

$3.45 as the implicit monthly market 

price for Sirius XM’s music channels.30

Dr. Noll identified three methods for 

determining the implicit price. The first 

is the average retail price of $3.15 taken 

from Last.fm’s and Pandora’s noninteractive subscription services. Noll 

Revised WRT at Table 1, SXM Reb. Trial 

Ex. 6. As with Last.fm, there is no 

adjustment to account for functional 

differences between the Pandora 

webcasting service and satellite radio, 

whose primary use is in the automobile. 

Dr. Noll’s second method is to derive 

a market price for Sirius XM using a 

survey conducted by Sirius XM’s 

witness Professor John Hauser that 

attempts to measure the value of music 

to Sirius XM subscribers. Professor 

Hauser posited an anchor price for the 

Sirius XM service to his survey 

respondents, and then randomly 

removed features (such as lack of 

commercials, quality of sound, etc.) to 

determine how much the respondents 

would be willing to pay for the service 

after each feature is removed. Hauser 

Corrected WRT at 20–22, SXM Dir. Trial 

Ex. 24. After averaging the results, he 

determined that subscribers place an 

average value on Sirius XM’s music 

channels of $3.24. Id. at Appendix G. 

Professor Hauser’s survey is of limited 

value. By design, the higher number of 

features or attributes of the Sirius XM 

service included in the survey, the 

lower the estimated value of any given 

service. This feature of the survey 

produces anomalous outcomes, such as 

survey results showing that subscribers 

would pay a certain amount for 

ubiquitous station availability, premium 

sound quality and absence of 

commercials, all without any 

programming content. See Ordover 

Amended WRT at 35, SX Trial Ex. 218. 

Third, Dr. Noll sought to calculate the 

cost of inputs necessary for delivery of 

Sirius XM’s programming via satellite 

and its subsidization/installation of 

radio receivers in automobiles 

(described as ‘‘unique’’ costs to the 

satellite radio service), to then deduct 

those costs from gross revenues, and 

allocate the remaining revenue between 

music and non-music content. Noll 

Revised Amended WDT at 81–83, 85, 

SXM Dir. Trial Ex. 1. After making these 

calculations, Dr. Noll credited 55.1%, or 

$3.45, to music channels. Id. at 88 and 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23065 

31Likewise, Sirius XM has failed to demonstrate 

that it could successfully substitute away to other 

providers of music. If that were the case, Sirius XM 

could have operated its business under the Direct 

Licenses, for example, and avoided participation in 

this proceeding altogether. 

32SoundExchange contends that the Judges 

should completely discount the Direct Licenses 

because they were negotiated under the shadow of 

the statutory rate which was sure to influence the 

rates the parties agreed to as well as their 

willingness to negotiate at all. SX PFF ¶ 371. 

Although the Judges considered that fact when 

determining the amount of weight that the Direct 

License benchmark received, the Judges question 

whether any agreements regarding sound recording 

rights could be purely market-based given the 

current statutory framework. With that 

understanding, the Judges do not have the luxury 

of ignoring record evidence of the contemporaneous 

results of arm’s length negotiations between the 

same buyers and sellers and rights involved in the 

market for which the Judges are charged to 

determine a reasonable rate that will remain 

reasonable for the next five years, no matter how 

many weaknesses those results might exhibit. 

Table 3. Sirius XM contends that 

including the unique delivery costs and 

investments of its service is appropriate 

in Dr. Noll’s calculation. Sirius XM cites 

to major record company agreements 

with Cricket and MetroPCS (mobile 

service providers that bundle telephone 

service and interactive music service 

into a single package) that reflect that a 

percentage royalty rate for music must 

be reduced by a commensurate 

proportion to reflect revenue collected 

for the non-music portion of the 

bundled service. Sirius XM PFF ¶¶169– 

173. 

SoundExchange’s expert economist, 

Dr. Thomas Lys, explained, however, 

that because most of the unique costs 

that Dr. Noll allocated are relatively 

fixed, the per-subscriber amounts vary 

inversely with the number of 

subscribers. Lys WRT at 57, SX Trial Ex. 

240. Dr. Noll performed his calculation 

of costs using 2010 data, but had he 

used subscriber numbers for the years 

thereafter, which have continued to 

increase, and are anticipated to increase 

further in the coming licensing term, the 

analysis would show lower unique costs 

per subscriber and a higher value of 

music. Id. The dependency of Dr. Noll’s 

methodology on timing and the number 

of subscribers undermines its reliability 

for quantifying what the unique costs 

are likely to be in the coming rate term. 

Id. at 58. 

Sirius XM’s analogy to the bundled 

services of Cricket and MetroPCS is 

inapposite. Unlike those services, the 

success of Sirius XM is dependent upon 

its access to music. 6/14/12 Tr. 2270:7– 

2271:15 (Ordover); see also 6/5/12 Tr. 

235:6–10 (Noll)(‘‘It’s a bundle of 

services, it’s a distribution system, a 

bunch of nonmusic content and a bunch 

of music content, all of which are 

essential. And you pull the plug on any 

one of them, and the whole thing 

collapses.’’); 6/11/12 Tr. 1431:10–17 

(Karmazin). The value of Sirius XM’s 

satellite radio service is the bundling of 

music and non-music content with its 

delivery platform, and Sirius XM has 

failed to present convincing evidence 

that its delivery platform and non-music 

content, alone, present a viable 

business.31

In sum, these concerns, coupled with 

those surrounding the Direct Licenses 

themselves, show weaknesses in the 

proposed Direct License benchmark that 

diminish its usefulness. Therefore, the 

Judges find that the 7% rate, which 

represents the high end of the Direct 

License rates, represents the lower 

bound of a zone of reasonableness. The 

Judges believe that a rate any lower, 

given the prevailing statutory rate, 

would more than likely be overly 

influenced by the particular terms of the 

Direct License agreements, which are 

not part of the statutory license.32

b. Analysis of SoundExchange’s 

Proposed Interactive Subscription 

Services Benchmark 

The Judges have determined in the 

past that the interactive subscription 

service market has characteristics 

reasonably similar to those of the 

SDARS market. SDARS–I, 73 FR at 

4093. Moreover, Dr. Ordover’s proposed 

interactive subscription service 

benchmark in this proceeding analyzes 

certain useful data sets that make it 

difficult to dismiss the proposed 

benchmark outright. For example, the 

agreements Dr. Ordover examined 

represent a relevant data source from 

which to consider the outcomes of 

marketplace negotiations. That being 

said, the Judges do not find that the 

market for interactive subscription 

streaming services as characterized by 

Dr. Ordover in this proceeding offers a 

foundation to support a comparable 

benchmark from which to begin an 

analysis of reasonable rates for SDARS 

for the upcoming license period. 

For example, the rights licensed by 

interactive subscription services are not 

the same as those by non-interactive 

services such as the SDARS, and the 

Judges did not find Dr. Ordover’s efforts 

to adjust for the differences to be 

helpful. Dr. Ordover attempted to 

account for these differences by offering 

two alternative approaches, both of 

which seek to enhance the 

comparability of this proposed 

benchmark to the SDARS market. As 

discussed above, his first alternative 

approach attempts to adjust for service 

content between the two markets. The 

Judges doubt whether this approach 

adequately adjusts the interactive 

subscription service market to account 

for differences in attributes and 

functionality between that market and 

satellite radio. Dr. Ordover’s second 

alternative approach attempts to adjust 

for interactivity. Ordover Third 

Corrected/Amended WDT at 33–34, SX 

Trial Ex. 74. The Judges found this effort 

to be somewhat more pertinent. 

Nevertheless, the Judges find that the 

differences between Sirius XM and the 

‘‘buyers’’ in the proposed benchmark 

severely constrain the usefulness of the 

proposed Ordover benchmark. Dr. 

Ordover’s proposed interactive 

subscription streaming service 

benchmark was based on licensing fees 

paid to the four major record labels for 

2011 by seven internet streaming 

services and for one-half of 2012 for 

some of those services. Ordover Third 

Corrected/Amended WDT at 19–21, SX 

Trial Ex. 74. 

Dr. Ordover characterizes the 

streaming services as ‘‘well-established 

services like Microsoft Zune, Napster, 

and Rhapsody, and newer market 

entrants like Rdio and MOG.’’ Id. Dr. 

Ordover concedes, however, that in 

October 2011, Rhapsody announced that 

it was acquiring Napster. Id. at 19, n.16. 

Notably, in 2012 Microsoft ceased 

offering Zune as a stand-alone service 

and rolled it into its XBOX service suite. 

See http://www.xbox.com/en-S/Live/ 

Partners/Zune. In addition, one of the 

services upon which Dr. Ordover based 

his proposed benchmark, Slacker 

Premium, was not introduced until May 

2011, so not even a full year’s payment 

data was available for that service. 

The royalty implications of these 

details are uncertain, but these details 

about the proposed benchmark market 

underscore the fluid nature of the 

subscription streaming market and the 

difficulty of generalizing the royalty 

obligations of a market based on a few 

quarters worth of payment data for a 

handful of services. In short, the 

interactive subscription service market 

upon which Dr. Ordover relied is in a 

constant state of flux. No single buyer or 

group of buyers in that market seems 

comparable to Sirius XM in terms of its 

name recognition and status as the sole 

provider of satellite radio service. 

Therefore, the Judges believe that Sirius 

XM likely would have been in a 

preferential bargaining position to the 

interactive subscription service 

providers and may have negotiated very 

different rates as a result. The Judges do 

not believe that Dr. Ordover accounted 

for this difference. 

Whereas the Judges criticized the 

Direct License benchmark data set for 

lacking one or more major record labels, 

mstockstill on DSK4VPTVN1PROD with RULES3

23066 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

33SoundExchange notes that ‘‘[t]here are no 

sound economic reasons to adjust market-based 

rates because of this statutory objective.’’ SX PFF 

¶ 502. Other than its affirmation that the revenue 

from the SDARS is important to record labels, SX 

PFF ¶ 515, SoundExchange directs us to no 

evidence in the record that would warrant an 

upward adjustment in the rate that is most strongly 

indicated by the totality of the evidence in the 

proceeding based on the first Section 801(b) factor. 

Therefore, the Judges limit the discussion in this 

section to Sirius XM’s arguments about why a 

downward adjustment is warranted under this 

factor. 

the proposed Ordover benchmark also 

lacks the balance of representing a 

broader subset of record labels. 

Although Sirius XM’s service may be 

‘‘hit’’ driven, it features a broad range of 

music offerings that span several 

decades and several genres. Indeed, the 

Judges suspect that much of the value of 

the Sirius XM service as opposed to 

broadcast terrestrial radio and other 

competitors is that Sirius XM plays a 

greater range of music, much of which 

may be licensed by non-major labels. 

Therefore, by focusing on the catalogues 

that the major record labels possess, 

although a crucial component of Sirius 

XM’s service, the proposed Ordover 

benchmark overlooked a subset of the 

entire universe of sound recordings for 

which the Judges must set a rate in this 

proceeding. The Judges believe that 

these comparability differences may 

help to explain why the rates in the 

subscription services market are so 

much higher than those in the Direct 

Licenses, although other factors are also 

at play. 

The yawning gap between the current 

rate of 8% and the highest rates 

proposed by Dr. Ordover raises 

additional concerns about the proposed 

Ordover benchmark. Indeed, the Judges 

find that the rates Dr. Ordover 

calculated based on his proposed 

principal benchmark (30%–32.5%) and 

his first alternative adjustment (29.81%) 

are so much higher than the current 

statutory rate that they are outside the 

zone of reasonableness. The rate that Dr. 

Ordover derives from his second 

alternative adjustment (22.32%), while 

suggesting a more reasonable 

alternative, can be viewed as no more 

than the upper bound of the zone of 

reasonableness, although it is a bound 

that the Judges have little confidence in. 

As a result, after analyzing the 

proposed benchmarks, both of which 

are flawed, the Judges are left with a 

zone of reasonableness with a floor of 

7% and an upper bound that can be no 

more than 22.32%. The Judges are also 

informed by SoundExchange’s proposed 

rates for SDARS, which start at 12% for 

2013. Presumably, SoundExchange 

would not have proposed this entry rate 

if it did not believe it to be reasonable. 

Lastly, the Judges consider the 

prevailing statutory rate of 8%, which 

the Judges adjusted down from a 13% 

rate in SDARS–I based on the fourth 

Section 801(b) factor. SDARS–I, 73 FR at 

4093–4098. With these guide posts in 

mind, the Judges analyze the Section 

801(b) factors. 

4. Application of Section 801(b) Factors 

The Copyright Act requires that the 

Judges establish rates for the Section 

114 license that are reasonable and 

calculated to achieve the four specific 

policy objectives set forth in Section 

801(b) of the Copyright Act. In 

analyzing the Section 801(b) factors the 

Judges determine whether adjustments 

to the rate indicated by marketplace 

benchmarks, if any, are warranted and, 

if so, whether there is sufficient 

evidence in the record to support such 

adjustments. SDARS–I, 73 FR at 4094 

(Jan. 24, 2008). The absence of solid 

empirical evidence that might suggest a 

difference between the benchmark and 

target markets cautions against the need 

for an adjustment. Id. at 4094–4095. In 

SDARS–I, the Judges determined that no 

adjustment was warranted for the first 

three factors but that a downward 

adjustment was warranted for the fourth 

factor—minimization of disruptive 

impact—for reasons discussed in 

section (d) below. SoundExchange 

argues that no adjustment is warranted 

in the current proceeding. SX PFF 

¶ 497. Sirius XM contends, however, 

that an analysis of the Section 801(b) 

factors ‘‘counsels setting a royalty rate at 

the low end of the range of reasonable 

rates.’’ Sirius XM PFF ¶ 227. 

a. Maximize the Availability of Creative 

Works 

Sirius XM contends that a downward 

adjustment from the benchmark rate is 

warranted with respect to the first 

Section 801(b) factor—maximizing the 

availability of creative works to the 

public.33 Sirius XM PFF ¶ 227. To 

support its contention, Sirius XM argues 

that the term ‘‘availability’’ in this factor 

encompasses both the incentive to 

produce creative products and the 

delivery of those products to consumers. 

Id. at ¶ 228. Sirius XM states that its 

service enhances the delivery and 

availability of sound recordings by: 

‘‘providing an uninterrupted nationwide 

broadcast of unparalleled breadth and 

depth; exposing listeners to music that 

is not played elsewhere; and creating 

original music programming to promote 

artists * * *.’’ Id. at ¶ 230. Sirius XM 

also contends that, unlike its service, 

which it posits promotes phonorecord 

sales, internet subscription services, 

which formed the basis of the proposed 

Ordover benchmark, show no such 

promotional value, and in fact, may 

cannibalize phonorecord sales. Id. at 

¶¶ 253–254 and 257–260. 

Much of the evidence that Sirius XM 

presented to show the promotional 

effect of Sirius XM’s service on 

phonorecord sales consists of testimony 

detailing record labels’ efforts to get 

their artists airplay on Sirius XM and 

elsewhere. See, e.g., id. at ¶ 253 

(‘‘SoundExchange’s witness Darius Van 

Arman, co-owner of several 

independent record labels, conceded 

that ‘one of the goals of [his labels’] 

promotional activities [is] to get [his] 

artists airplay * * * includ[ing] airplay 

on Sirius XM.’’). It is not surprising that 

record labels seek airplay for the artists 

they represent. Nor would it be 

surprising to learn that increased airplay 

on Sirius XM can enhance phonorecord 

sales. Those facts alone, even if assumed 

to be true, would not provide the type 

of substantial empirical evidence that 

might support a downward adjustment 

from the rates most strongly suggested 

by the evidence in the record. 

As SoundExchange notes, ‘‘Sirius 

XM’s case attempting to connect Sirius 

XM airplay with sales of sound 

recordings consists of less than ten 

pieces of anecdotal evidence over a fiveyear period.’’ SX RFF at ¶ 228 (emphasis 

in original). The Judges agree with 

SoundExchange that Sirius XM provides 

insufficient probative evidence upon 

which the Judges could make a 

meaningful assessment of the relative 

promotional value of Sirius XM’s 

service vis a ́ vis interactive internet 

subscription services. See 10/16/2012 

Tr. 4874:16–18 (Sirius XM closing 

argument by Mr. Rich, noting the 

anecdotal nature of Sirius XM’s 

promotional evidence). 

The Judges are also unpersuaded by 

Sirius XM’s assertion that the purported 

lack of promotional value of interactive 

internet services should warrant a 

downward adjustment from a 

marketplace benchmark rate upon 

which the Judges might rely. Evidence 

to support Sirius XM’s contention that 

interactive internet services are 

substitutional and may cannibalize 

phonorecord sales is sparse. In this 

regard, the Judges place little credence 

on blanket statements such as that by 

Dr. Noll that ‘‘there’s no question’’ that 

interactive subscription services have 

no promotional impact on record sales, 

because ‘‘[o]n demand services let 

customers play a specific recording on 

request, allowing the same control over 

play sequence that customers have in 

playing recordings from personal 

libraries.’’ Sirius XM PFF at ¶ 257, 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23067 

34 Dr. Noll concedes that ‘‘there’s no published 

academic research on this issue, and, indeed, 

there’s not enough data available for me to 

undertake such a research project.’’ 6/5/12 Tr. 

227:22–228:3 (Noll). Moreover, he concedes that 

even the industry studies that have been done are 

ambiguous in their conclusions. Some think there’s 

a substitution effect, some think there isn’t. On 

balance, it seems to be the case that issue is 

unresolved, but there’s no—there’s no question that 

you wouldn’t say it’s a promotional effect, like 

satellite radio or terrestrial radio. It’s either nothing 

or it’s a substitution effect. 

Id. at 228:8–16. 35See, e.g., 8/13/2012 Tr. 3049:8–16 (Frear). 

quoting Noll Revised Amended WDT at 

22 and 6/5/12 Tr. 227:16–228:16 

(Noll).34

Dr. Noll’s statement is more 

descriptive of the nature of interactive 

services than supportive of the claim 

that those services increase substitution. 

Even if the Judges were to take at face 

value Dr. Noll’s implication that a 

subscriber’s ability to play a particular 

track on demand discourages the 

subscriber from purchasing that track, 

that fact alone would not address the 

more general notion regarding the 

relative promotional value (or lack 

thereof) of interactive internet streaming 

services. Promotional value can extend 

far beyond a service’s impact on a single 

track by a single artist; it may extend to 

an artist’s entire catalogue as well as to 

related artists or genres. 

With respect to the potential 

substitutional effect of interactive 

internet streaming services, Sirius XM 

references certain industry projections 

that assume a certain rate of 

cannibalization for such services. Sirius 

XM PFF ¶¶ 259–260. Even if these rates 

were assumed to be reasonable 

projections for this type of service, they 

are not supportive of a downward 

adjustment from a marketplaceinfluenced benchmark rate because they 

are already taken into account in 

determining the royalty rates that the 

services pay. See, e.g., id. at ¶ 260; PSS 

Ex. 8 at 3 (SX02 00027594); 6/13/12 Tr. 

2061:16–2062:3 (Bryan) (Warner Music 

Group’s estimate of potential 

substitution effect of Spotify’s service). 

In sum, the Judges find no probative 

evidence to warrant an adjustment from 

a marketplace-derived benchmark rate 

under this factor. 

b. Afford Fair Return/Fair Income Under 

Existing Market Conditions 

With respect to the second Section 

801(b) factor—affording a fair return to 

the copyright owner and fair income to 

the copyright user—the Judges find that 

little has changed since SDARS–I, in 

which the Judges determined that no 

adjustment from the benchmark rate 

was warranted. 

1. The Parties’ Contentions 

SoundExchange argues that no 

adjustment to a marketplace-derived 

benchmark rate is warranted ‘‘unless 

there is a clear showing that the 

benchmark rates were elevated by the 

exercise of monopoly power.’’ SX PFF 

¶ 504. SoundExchange contends that no 

such monopoly power was shown with 

respect to the marketplace benchmark 

that SoundExchange proposes or with 

respect to ‘‘other non-statutory 

distribution channels.’’ Id. 

SoundExchange contends that ‘‘any 

downward adjustment would amount to 

a ‘subsidy’ for Sirius XM, which would 

provide the company with an 

unwarranted competitive advantage 

relative to rival distributors of music 

content, and also dilute the incentives 

for the creation of new works and for 

the efficient transmission of music 

through new and emerging channels.’’ 

Id.; Ordover Third Corrected/Amended 

WDT at 10, SX Trial Ex. 74. 

SoundExchange also stresses the 

growing importance to artists and record 

labels of digital income streams as sales 

of physical products decline. SX PFF 

¶ 528. 

For its part, Sirius XM contends that 

‘‘the implementation of this factor 

requires assessing whether the royalty 

rate allows both the buyer (Sirius XM) 

and the sellers (the record labels) to 

recover their costs, including the 

financial cost of capital used to make 

investments.’’ Sirius XM PFF ¶ 263. 

Sirius XM states that those costs must 

be measured cumulatively and not as a 

‘‘snapshot of annual operating costs.’’ 

Id. While Sirius XM concedes that the 

company has shown a ‘‘recent trend of 

profitability,’’ it contends that ‘‘it will 

be years before Sirius XM recoups all of 

its losses from the last two decades; 

thus, any increase to those costs, such 

as an increase in the SoundExchange 

royalty rate, will only lengthen the time 

it takes to recoup these losses and 

directly interfere with Sirius XM’s 

ability to achieve a fair return on its 

investments.’’ Id. at ¶ 265. 

2. The Judges’ Analysis 

In SDARS–I, the Judges stated: 

Affording copyright users a fair income is 

not the same thing as guaranteeing them a 

profit in excess of the fair expectations of a 

highly leveraged enterprise. Nor is a fair 

income one which allows the SDARS to 

utilize its other resources inefficiently. In 

both these senses, a fair income is more 

consistent with reasonable market outcomes. 

73 FR 4095 (footnote omitted). 

In the absence of substantial evidence 

in the record to the contrary, any 

marketplace benchmark rate that guides 

the selection of rates will encompass 

such a return because it represents the 

best evidence of reasonable market 

outcomes. In this proceeding, the Judges 

find the proposed Direct License 

benchmark provides useful guidance for 

setting the lower bound of a zone of 

reasonable rates. The Judges find no 

probative evidence, however, to suggest 

that that rate should be adjusted under 

this factor. Presumably, being 

marketplace-inspired, the rate already 

reflects a fair income and a fair return. 

SoundExchange stresses the growing 

importance of digital revenue streams 

for copyright owners, a trend that was 

certainly in play during the SDARS–I 

proceeding. The Judges find no material 

change in that trend in the current 

record that would warrant an upward 

adjustment from a marketplace-derived 

benchmark rate. In turn, Sirius XM 

stresses the importance of the rate on 

the timing of Sirius XM’s return to 

profitability. The SDARS made similar 

points in the SDARS–I proceeding. 

Sirius XM’s current trend toward 

profitability and its ability to pass on at 

least a portion of the rate increase to its 

subscribers35 suggests that the 

prevailing statutory rate—which was 

informed by a marketplace benchmark 

and which is within the zone of 

reasonableness the Judges establish in 

the current proceeding—did not hinder 

Sirius XM’s ability to earn a fair income. 

In this proceeding, the Judges set the 

lower bound of the zone of 

reasonableness at 7% based on 

marketplace outcomes. Therefore, the 

Judges are confident that fair income 

and returns are reflected by that rate. In 

SDARS–I the Judges found that the same 

was true with respect to the statutory 

rate of 8%, as well as the 13% rate to 

which the Judges applied the Section 

801(b) factors to derive the 8% rate. The 

current record does not support a 

change in that conclusion. Therefore, 

the Judges find no justification in this 

proceeding for an adjustment either up 

or down pursuant to the second Section 

801(b) factor for rates in a range of 7% 

to 13%. 

c. Weigh Relative Roles of Copyright 

Owner and Copyright User 

1. The Parties’ Contentions 

According to Sirius XM, ‘‘when using 

the royalty rate paid by an Internetbased music service as a benchmark for 

setting royalty rates for Sirius XM, one 

must first identify the contributions that 

are unique to Sirius XM * * * and then 

compare these contributions to those 

made by the Internet-based services that 

mstockstill on DSK4VPTVN1PROD with RULES3

23068 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

36The Judges acknowledge that the sellers in the 

Direct Licenses represent a small subset of 

independent labels and exclude major labels, 

which, according to Sirius XM, were unwilling to 

enter direct license negotiations with Sirius XM. 

Sirius XM PFF ¶ 47–48. Nevertheless, the depth and 

breadth of the labels that signed Direct Licenses 

with Sirius XM strongly suggest that the relative 

role of the independent labels that entered the 

Direct Licenses with Sirius XM is, for the limited 

purpose of analyzing the third Section 801(b) factor, 

sufficiently comparable to that of independent 

labels generally and to that of the major labels. See, 

e.g., Sirius XM PFF ¶¶ 91–103; Noll Revised 

Amended WDT at 39–44 (record labels that signed 

Direct Licenses included: One of Billboard’s top 

five independent labels for eight of the past nine 

years; labels that represented Grammy Awardwinning and Grammy Award-nominated artists in 

multiple categories; a label that amassed more than 

20 number one albums on Billboard’s kids’ album 

chart; the world’s largest independent classical 

music label with a repertoire of over 2500 titles; a 

label with three songs on the Contemporary 

Christian top 10 during a period in 2012 and eight 

of the 50 spots on the Christian songs chart in 2012; 

a label representing an artist with the number one 

Billboard Heatseeker album in 2011; a label 

representing an artist with three Gold records; and 

a label that released the comedy albums of five-time 

Grammy Award-winning comedian George Carlin), 

SXM Dir. Trial Ex. 1. That being said, the absence 

of a major record label in the Direct License 

agreements supports the Judges’ earlier conclusion 

that rates below 7% are below the lower bound of 

the zone of reasonableness. 

37To the extent that the rights between the Direct 

License benchmark and target market vary in 

are being proposed as a benchmark.’’ 

Sirius XM PFF ¶ 277, referencing Noll 

Revised Amended WDT at 25–26, SXM 

Dir. Trial Ex. 1; 8/14/2012 Tr. 3463:13– 

3464 (Noll). In this regard, Sirius XM 

notes that it has spent over $10 billion 

in creating and supporting its service 

and that those costs have not yet been 

recovered. Sirius XM PFF ¶ 278. 

According to Sirius XM, these ‘‘massive 

contributions only continue to increase, 

and far outweigh those made by 

Internet-based services that serve as 

benchmarks for setting royalty rates for 

Sirius XM.’’ Id. See also id. at ¶ 295 

(quoting Professor Noll and Mr. 

Karmazin for the proposition that Sirius 

XM’s costs in developing its system far 

exceed those of the internet streaming 

companies). Sirius XM also points to its 

payments to automakers to encourage 

them to include Sirius XM’s service in 

the vehicles they make, payments 

which, according to Sirius XM, the 

internet-based streaming services do not 

make. Sirius XM PFF ¶¶ 294, 296. 

Sirius XM also contends that the 

record industry does not incur any 

additional incremental cost in making 

digital sound recordings available to 

Sirius XM. Id. at ¶¶ 279, 303. Sirius XM 

contends that, as a result of its 

contributions to its service, it should 

receive a downward adjustment from 

the benchmark rate, to the extent that 

rate is based on an internet streaming 

benchmark. Id. at ¶ 297–298 (‘‘simply 

applying the percentage-of-revenue rate 

paid by benchmark Internet-based 

music services to the full revenues of 

Sirius XM without adjustment [to either 

the rate or the revenue base] would fail 

to recognize Sirius XM’s relative 

contribution and ‘would effectively give 

record labels a share of revenues that 

have nothing to do with the sound 

recording rights they are licensing.’ ’’) 

Id. at ¶ 298, quoting Salinger Corrected 

WRT ¶ 18, SXM Reb. Trial Ex. 9. 

For its part, SoundExchange stresses 

the risks and costs the record labels 

incur in making, promoting and 

distributing music. For the perspective 

of a major record label, 

SoundExchange’s evidence consists 

largely of testimony from UMG’s Mr. 

Ciongoli who detailed UMG’s costs in 

finding, developing, and marketing 

artists. SX PFF ¶¶ 535–542. In addition, 

SoundExchange presented the 

testimony of Mr. Van Arman who 

discussed the costs and efforts that 

independent labels typically incur in 

finding and promoting artists. Id. at 

¶ 544. 

2. The Judges’ Analysis 

The Judges’ task with respect to the 

Section 801(b) factors is to determine 

whether the record presents solid 

empirical evidence of a difference 

between the benchmark market, if any, 

and the target market that would 

warrant an adjustment in the rate most 

strongly suggested by the evidence. 

In SDARS–I, the Judges found that 

[C]onsidering the record of relevant 

evidence as a whole, the various sub-factors 

identified in this policy objective may weigh 

in favor of a discount from the market rate 

because of the SDARS’ demonstrated need to 

continue to make substantial new 

investments to support the satellite 

technology necessary to continue to provide 

this specific service during the relevant 

license period. However, inasmuch as we 

find this issue is intimately intertwined with 

evidence impacting our consideration of the 

fourth 801(b) policy objective (i.e., 

minimizing any disruptive impact on the 

structure of the industries involved), we will 

treat the effect of this particular matter as 

part of our consideration of the fourth policy 

objective. 

73 FR 4096. 

With this exception, we found no 

other rationale for an adjustment either 

up or down from the benchmark rates 

based on this factor. Id. at 4096–4097. 

In the current proceeding, in setting 

the lower bound of the zone of 

reasonableness the Judges were guided 

by the Direct Licenses Sirius XM 

negotiated with certain independent 

records labels. Deriving the upper 

bound of the zone of reasonableness has 

proved to be more problematic. The 

Judges conclude that the upper bound 

cannot be above the 22.32% rate from 

Dr. Ordover’s second alternative 

approach. Moreover, the Judges are 

confident that the current statutory rate 

of 8% is within the zone of 

reasonableness. The Judges also are 

informed by the presumed 

reasonableness of the 12% rate that 

SoundExchange proposed for 2013 and 

by the 13% benchmark rate that served 

as a benchmark in SDARS–I. Given the 

Judges’ relative confidence in the 

reasonableness of the 7% to 13% range, 

consideration of the third Section 801(b) 

factor is directed at that range. 

Since the Direct License benchmark 

involves the same buyer (Sirius XM) 

and the same sellers (record labels) as 

the buyers and sellers in this 

proceeding—and they negotiated over 

the same rights set—the Judges find that 

the buyers and sellers in the benchmark 

market sufficiently replicate those in the 

target market.36 With respect to the 

rights for which Sirius XM and the 

independent labels negotiated, evidence 

in the record indicates that the Direct 

Licensors granted broader rights than 

just the public performance rights that 

are the subject of the Section 114 

compulsory license and that Sirius XM 

offered incentives beyond those that 

would be available through the 

compulsory licensing scheme. See, e.g., 

SX PFF ¶¶ 386–400 (citing defrayed 

administrative costs, the ability of Sirius 

XM to play more of an artist’s works 

over a given time, and direct payment 

of the artists’ share to the independent 

labels, among others, as key differences 

between the Direct Licenses and the 

compulsory licenses that might warrant 

a lower effective royalty rate). 

The Judges acknowledge the 

differences between the compulsory 

license and the Direct Licenses, but 

view many of those differences as more 

a matter of administrative convenience 

than of differences in the substantive 

rights of the parties with respect to the 

public performance right. For example, 

if an artist is entitled to a certain share 

of profits from the sale of his or her 

records, that right is not diminished by 

the fact that the share is paid by 

SoundExchange or by the label with 

which the artist has signed. As far as the 

non-administrative differences (e.g., 

waiver of the statutory restriction on the 

number of times an artist’s works may 

be played over a given time), it may well 

be that the benefits inure equally to both 

Sirius XM and the artists represented by 

the independent labels, many of whom 

may value broader exposure in lieu of 

statutory restrictions on the amount 

their works may be played.37 Therefore, 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23069 

material respect, the Judges reflected such variances 

in the decision to adopt the upper end (i.e., 7%) of 

the range of rates for the benchmark. 

38Sirius XM attributes its current profitability 

largely to its one-time merger-related cost cuts. 

Frear WDT at 8, SXM Dir. Trial Ex. 12. It is also 

noteworthy that Sirius XM reduced its 

programming costs by renegotiating its agreements 

with several high-profile content providers. Id. at 8– 

9. Sirius XM expects, however, that its operating 

costs will increase over the licensing period. Id. at 

20. According to Sirius XM, optimistic public 

statements made by Sirius XM’s management 

should be discounted as ‘‘puffery.’’ Sirius XM PFF 

¶ 312 and n.66. 

the rights that the parties negotiated for 

in the benchmark market are reasonably 

comparable to those in the target market 

and no upward adjustment from the 

lower bound benchmark rate is 

warranted based on the third Section 

801(b) factor. 

With respect to the upper bound of 

the zone of reasonableness, which is 

informed by licenses between major 

record labels and certain interactive 

streaming services, the sellers are 

acceptably comparable to the target 

market (i.e., record labels). Although 

evidence in the record addresses the 

costs UMG incurs generally as a major 

record label and the costs Mr. Van 

Arman’s independent labels incur in 

developing the artists that they sign, no 

substantial empirical evidence 

addresses the unique costs and 

contributions that the record labels 

make with respect to providing their 

recordings to Sirius XM. Because the 

Judges conclude that the sellers in the 

proposed benchmark market that guided 

the upper bound of the zone of 

reasonable rates are comparable to those 

in the target market, their contributions, 

risks, and costs are presumed to already 

be incorporated into the rates that set 

the upper bound. Therefore, the sellers’ 

contributions in the target market do not 

indicate that an adjustment from the 

bounds of the zone of reasonableness is 

warranted. 

Determining the comparability 

between the buyers that yielded the 

upper bound requires a comparison 

between Sirius XM and the internet 

streaming services that are the buyers in 

the proposed Ordover benchmark 

market. As the Judges recognized in 

SDARS–I, Sirius XM has demonstrated 

the need to continue to make substantial 

new investments to support the satellite 

technology necessary to continue to 

provide its specific service during the 

relevant license period. The Judges have 

no substantial evidence in the record, 

however, that would lead to a 

conclusion that the internet-based 

streaming services have ongoing 

distribution system costs anywhere near 

those of Sirius XM. According to Mr. 

Karmazin, Sirius XM anticipates 

investing more than [REDACTED] to 

maintain, upgrade, and, where 

necessary, replace its technological 

infrastructure during the 2013–17 

licensing period. Karmazin WDT at 4, 

SXM Dir. Trial Ex. 19. A large portion 

of the system’s costs relate to Sirius 

XM’s satellites. According to Sirius XM, 

over the past six years, the company has 

spent approximately $1.5 billion 

replenishing satellites. Sirius XM PFF 

¶ 289; Meyer WDT at 23–24, SXM Dir. 

Trial Ex. 5. A satellite’s useful life is 

between 12 and 15 years. Meyer WDT 

at 24, SXM Dir. Trial Ex. 5. Sirius XM 

expects that its newly replenished 

satellite networks will maintain its 

services through 2020. Sirius XM PFF 

¶ 291; Meyer WDT at 24, SXM Dir. Trial 

Ex. 5. 

Such substantial financial outlays are 

unique to Sirius XM, which has 

developed a proprietary music 

distribution system, rather than use the 

existing internet framework, as the 

services in the proposed Ordover 

benchmark market have done. Although 

the costs of developing and launching 

the current generation of satellites has 

already been sunk, it is not 

unreasonable for Sirius XM to expect to 

recoup a certain amount of those costs 

over the expected useful life of the 

satellites. Moreover, the costs of 

maintaining the current satellites and 

planning and developing the new 

generation of satellites will require 

additional, substantial costs over the 

license period. See Meyer WDT at 24, 

SXM Dir. Trial Ex. 5. In light of the 

substantial evidence in the record of the 

unique and substantial financial costs 

that Sirius XM has incurred and 

anticipates incurring over the license 

period to maintain and upgrade its 

distribution system, the Judges find that 

the most appropriate rate for the current 

license period will be somewhat below 

the 12%-13%, which the Judges are 

reasonably confident represents the top 

of the zone of reasonableness. Therefore, 

the rates that the Judges announce in 

this determination for the SDARS reflect 

a downward adjustment from the 12%- 

13% range based upon the third Section 

801(b) factor. 

d. Minimize Disruptive Impact 

Although the rate the Judges set in 

this proceeding is just one component 

that will impact the future of Sirius XM 

and the copyright owners, the rate could 

be considered disruptive (and thereby 

warrant an adjustment) if the 

unadjusted rate ‘‘directly produce[d] an 

adverse impact that is substantial, 

immediate, and irreversible in the shortrun because there is insufficient time for 

either the SDARS or the copyright 

owners to adequately adapt to the 

changed circumstances 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.’’ 73 FR 4097. In SDARS–I, the 

Judges found that a downward 

adjustment from the upper boundary of 

the marketplace benchmark was 

justified on two grounds: (1) The 

SDARS’ were not sufficiently profitable 

and did not have a sufficiently broad 

subscriber base to sustain an immediate 

rate increase from a range of 2.0%-2.5% 

to 13% of revenues and (2) a 13% rate 

would potentially constrain the SDARS’ 

ability to undertake satellite 

investments planned for the license 

period, which, if delayed, could disrupt 

the SDARS’ consumer service. Id. 

1. The Parties’ Contentions 

In determining whether the fourth 

factor warrants an adjustment in the 

current proceeding, Sirius XM invites 

the Judges to consider Sirius XM’s 

‘‘tumultuous financial history’’ as well 

as the ‘‘increasing risks the Company is 

likely to face in the coming license 

term.’’ Sirius XM PFF ¶ 304. When so 

considered, Sirius XM argues that it 

‘‘faces a threat of disruption that is 

‘equal to or even greater than the one it 

faced at the time of the last rate 

proceeding.’ ’’ Id., quoting Stowell WDT 

¶ 41, SXM Dir. Trial Ex. 18. Sirius XM 

details its near-brush with bankruptcy 

in 2008 after Sirius and XM merged and 

its ultimate deal with Liberty Media 

Corporation to avert a bankruptcy filing. 

Frear WDT at 3–5, SXM Dir. Trial Ex. 

12. It also notes its achievement of 

profitability in 2010. Id. at 7.38 While 

acknowledging that its recent 

performance is ‘‘encouraging,’’ Sirius 

XM points out that it has cumulative net 

operating losses of $8 billion, which it 

has incurred over the past two decades. 

Sirius XM notes that any increases in its 

costs will lengthen the time it takes to 

recoup these losses. Id. at 7–8. 

Nevertheless, Sirius XM anticipates that 

its adjusted earnings before depreciation 

and amortization (‘‘EBITDA’’) for 2012 

will be $860 million on revenues of $3.3 

billion, which should allow Sirius XM 

to return capital to its investors. Id. at 

14 and n.11. 

Notwithstanding its anticipated 

profitability for 2012, Sirius XM notes 

that it is still in a financially tenuous 

position in the longer term. Threats that 

Sirius XM anticipates to its continued 

financial success include: its increasing 

dependence on the automobile industry; 

competitive threats from internet-based 

mstockstill on DSK4VPTVN1PROD with RULES3

23070 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

39Although the Judges agree that the fourth factor 

should be applied with caution (as should all of the 

factors), Section 801(b)(1)(D) of the Copyright Act 

does not restrict its application to ‘‘nascent and 

emerging services’’ and the Judges are unwilling to 

read such limitations into it. Nevertheless, the 

Judges are cognizant of SoundExchange’s concern 

that the fourth factor not be applied in a way that 

would shield service providers from a competitive 

marketplace. 

40EBITDA stands for Earnings, Before Interest, 

Taxes, and Depreciation Allowance. 

41Free cash flow measures cash generated by a 

company that is not needed to fund the current 

period’s operations or to reinvest in the firm’s 

future operations. Lys Corrected WDT at 18–19 n. 

94, citing Brealey, Richard, Stewart Myers and 

Franklin Allen, Principles of Corporate Finance, 

2006, p. 997. 

42The Judges are much less confident that the 

same could be said for an increase to the 22%– 

32.5% that the proposed Dr. Ordover benchmark 

might suggest. As a result, the Judges draw 

additional comfort that the upper bound of the zone 

of reasonableness is closer to 12%–13% than it is 

to 22.32%, which the Judges conclude the upper 

bound of the zone of reasonableness can be no more 

than. See infra at Section V.B.3.b. 

providers and ‘‘connected-car’’ 

technology; significant debt on Sirius 

XM’s balance sheet; and the continuing 

risk that Sirius XM could lose access to 

the credit markets to refinance its debt. 

Sirius XM PFF ¶¶ 322–328; Frear WDT 

at 21–22, SXM Dir. Trial Ex. 12. 

Although Sirius XM has been able to 

offset a portion of recent rate increases 

by passing some of those costs on to 

customers, continuing to do so in the 

future, Sirius XM contends, will run the 

risk of en masse subscriber defections. 

Id. at n.17. 

On the other hand, SoundExchange 

recommends that the Judges use a more 

circumspect approach to applying the 

fourth factor. SoundExchange proffers 

that ‘‘the fourth policy objective should 

be limited to a temporary facilitation of 

the ability of nascent and emerging 

services to gain consumer acceptance 

and potentially achieve an efficient 

scale of operation * * *. [O]nce a 

company achieves a material presence 

in the marketplace, as Sirius XM 

indubitably has, use of the fourth policy 

factor to reduce market-based rates 

should be considered only with extreme 

caution, and should never be used to 

shield the service at issue from the full 

rigors of vigorous marketplace 

competition.’’ SX PFF ¶¶ 550–551, 

citing Ordover Third Corrected/ 

Amended WDT at 5–6, SX Trial Ex. 

74.39

SoundExchange points to Sirius XM’s 

stronger financial position as evidence 

that no downward adjustment is 

warranted for this license period. To 

support its position SoundExchange 

relies in part on testimony from 

Professor Lys who noted, 

[S]ince the merger, Sirius XM has 

experienced steady growth in both the 

number of subscribers and subscriber 

revenues while at the same time experiencing 

cost reductions. As a result, the company has 

achieved sustainable and growing 

profitability. Further, in contrast to 2009, 

when the company restructured its debt, 

Sirius XM’s credit ratings and the underlying 

financial metrics related to its debt have 

improved substantially. 

Lys Corrected WDT at 8, SX Trial Ex. 

80. 

Professor Lys further represented that 

in the third quarter (Q3) of 2011, Sirius 

XM had adjusted EBITDA 40 of $197 

million, up 16% year-over-year for the 

same quarter. Id. at 19, citing ‘‘Sirius 

XM Radio Inc., Q3 2011 Earnings Call,’’ 

Capital IQ, November 1, 2011, p. 3. 

Professor Lys also stressed Sirius 

XM’s dramatic turn-around in free cash 

flow.41 In 2008, Sirius XM had negative 

free cash flow of over $550 million. Id. 

at 20. By 2009, Sirius XM’s free cash 

flow had turned to a positive $185 

million. By 2010, that number had 

reached $210 million. Sirius XM 

projected that its free cash flow for 2011 

would reach $400 million, a 90% 

increase over 2010, and would continue 

to grow in 2012. Id., quoting ‘‘Sirius XM 

Radio Inc., Q3 2011 Earnings Call,’’ 

Capital IQ, November 1, 2011, p. 3. 

2. The Judges’ Analysis 

In analyzing whether the fourth 

Section 801(b) factor warrants an 

adjustment (either up or down) to the 

rates delineating the zone of 

reasonableness, the Judges must 

examine the same set of circumstances 

that informed the Judges’ analysis in 

SDARS–I. In SDARS–I, the Judges found 

that a downward adjustment from the 

upper boundary of the marketplace 

benchmark was justified because: (1) 

The SDARS were not sufficiently 

profitable and did not have a 

sufficiently broad subscriber base to 

sustain an immediate rate increase from 

a range of 2.0%–2.5% to 13% of 

revenues (a potential five-fold or sixfold increase) and (2) a 13% rate would 

potentially constrain the SDARS’ ability 

to undertake satellite investments 

planned for the license period, which, if 

delayed, could disrupt the SDARS’ 

consumer service. 73 FR at 4097. 

Neither of those justifications is present 

to the same degree in the current record. 

Sirius XM is now in a far better 

financial position than either Sirius or 

XM was as a stand-alone company in 

2007, the first year of the current 

licensing period. In 2007, Sirius and XM 

had combined revenues of $2.1 billion 

and combined adjusted EBITDA of 

negative $565 million. SX PFF ¶ 556; SX 

Trial Ex. 16 at SXM_CRB_DIR_00021681 

(p.15). By year-end 2012, Sirius XM’s 

revenues are expected to be $3.4 billion 

and its EBITDA is expected to be 

approximately $900 million. SX Trial 

Ex. 217 at 7. In 2007, the SDARS free 

cash flow was negative $505 million. In 

2012, by contrast Sirius XM’s free cash 

flow is expected to rise to $700 million. 

SX PFF ¶ 556, citing SX Trial Ex. 16 at 

SXM_CRB_DIR_00021682 (p.16); SX 

Trial Ex. 217 at 7; see also Lys Corrected 

WDT at 18–21, SX Trial Ex. 80. 

Another key indicator of potential 

financial strength—net increase in 

subscribers—indicates that Sirius XM is 

much stronger than either of the SDARS 

were in 2007. In 2007, Sirius and XM 

had 17.3 million subscribers. By 2012, 

that number for Sirius XM had risen to 

23.5 million. SX PFF ¶ 554. Sirius XM 

was able to increase its net subscribers 

notwithstanding a period of relatively 

weak car sales—a key driver of new 

subscribers—and despite passing on a 

portion of the royalty rate increase to its 

subscribers. Id. and Frear WDT at 21 

n.17, SXM Dir. Trial Ex. 12. 

In percentage terms, the gap between 

the prevailing rate of 8% and the 12%– 

13% range that guides the upper bound 

of the zone of reasonableness in the 

current proceeding is much narrower 

than the comparable gap presented in 

SDARS–I. Indeed, an increase to 12% or 

13% would be less dramatic in 

percentage terms than was the increase 

the Judges adopted in SDARS–I, which 

Sirius XM has managed to sustain.42

The Judges also find that the second 

rationale found in SDARS–I for a 

downward adjustment, potential 

constraint on Sirius XM’s ability to 

undertake satellite investments during 

the license period, is a less pressing 

issue than it was during the prior 

licensing period. As discussed above, 

Sirius XM expects that its newly 

replenished satellite networks will 

maintain its services through 2020. 

Sirius XM PFF ¶ 291; Meyer WDT at 24, 

SXM Dir. Trial Ex. 5. Although there 

will be ongoing costs of maintaining its 

existing satellites—costs that justified a 

downward adjustment under the third 

factor—no substantial evidence in the 

record supports a downward adjustment 

based on Sirius XM’s need to replace its 

existing satellites during the current 

licensing period. Therefore, neither of 

the circumstances that justified a 

downward adjustment under the fourth 

factor in SDARS–I is currently present. 

The Judges find no new 

circumstances that would warrant a 

downward adjustment under the fourth 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23071 

43Sirius XM’s contentions that it faces risks of 

disruption due to its increasing reliance on the 

OEM distribution channels (i.e., the automobile 

market) (Sirius XM PFF ¶¶ 322–324), or potential 

risks from relying on a satellite infrastructure 

(Sirius XM PFF ¶¶ 316–317), or risks posed by 

macroeconomic conditions (Sirius XM PFF ¶¶ 318– 

320) are too speculative to suggest the type of 

substantial, immediate and irreversible adverse 

impact that would warrant a downward adjustment 

of the benchmark rate under the fourth factor. 

44SoundExchange’s proposed Gross Revenues 

definition is set forth at Second Revised Proposed 

Rates and Terms of SoundExchange, Inc., at 2–3 

(Sept. 26, 2012). 

factor. Sirius XM’s primary contention 

for a downward adjustment under the 

fourth factor centers largely on the 

competitive landscape, in particular, the 

threat of new technologies such as the 

connected car technology. Sirius XM 

PFF ¶¶ 325–328.43 While emerging 

technologies can dramatically change 

the competitive landscape from one 

licensing period to the next, the Judges 

find insufficient evidence in the record 

to suggest that connected car technology 

or any of the other emerging competitive 

threats discussed during the proceeding 

warrants a downward adjustment under 

the fourth factor during the current 

licensing period. 

SoundExchange has not alleged a 

disruption to the copyright owners as a 

result of the prevailing rate and the 

Judges are not inclined to lower that 

rate. Therefore, the Judges find no 

evidence that an increased rate, albeit 

one that is lower than that proposed by 

SoundExchange, would warrant an 

upward adjustment. Therefore, the 

Judges find no adjustment warranted 

under the fourth Section 801(b) factor. 

5. Conclusions Regarding Section 114 

Rates 

After reviewing the Section 801(b) 

factors in light of the zone of reasonable 

rates that has 7% as its floor and 12%– 

13% as its most likely ceiling, the 

Judges find that the most appropriate 

rate for SDARS for the 2013 to 2017 

licensing period is 11% of Gross 

Revenues. To minimize any potential 

disruptive impact of the rate increase, 

the Judges phase it in over the license 

period. Consequently, the Judges set 

forth the following SDARS rates: for 

2013: 9.0%; for 2014: 9.5%; for 2015: 

10.0%; for 2016: 10.5%; and for 2017: 

11.0%. 

VI. Definition of Gross Revenues and 

Deductions 

A. Definition of Gross Revenues 

1. SoundExchange’s Proposal 

The revenue base against which the 

adopted royalty rates would be applied 

is a matter of considerable disagreement 

between the parties. Sirius XM requests 

continuance of the current definition of 

Gross Revenues in 37 CFR 382.11, 

arguing that it properly identifies only 

those revenues that are related to the 

provision of statutorily licensed sound 

recordings. See Sirius XM PFF ¶ 416. 

SoundExchange favors a considerable 

expansion of the revenue base, stating 

that its proposed changes would 

conform the royalty base to the 

economics underlying the percentageof-revenue royalty rates within the 

benchmarks offered in this proceeding, 

and would make the Gross Revenues 

definition easier to administer and less 

susceptible to interpretation and 

manipulation. Bender WDT at 12, SX 

Trial Ex. 75. 

SoundExchange’s proposed Gross 

Revenues definition 44 is based upon an 

interpretation of the Judges’ use in 

SDARS–I of Dr. Ordover’s adjusted 

interactive subscription service 

benchmark to establish the upper 

boundary of reasonable royalty rates for 

an SDARS service. SDARS–I, 73 FR at 

4093–4094. The use of that benchmark, 

in SoundExchange’s view, demonstrates 

an intention of the Judges to use total 

subscription revenue as the base against 

which the royalty rates should apply. 

Bender WDT at 6, SX Trial Ex. 75. 

Applying this assumption to the 

revenues reported by Sirius XM from 

2007 through the third quarter of 2011, 

SoundExchange concludes that Sirius 

XM has paid roughly 16%–23% less in 

total royalty fees than intended. Id. at 6– 

7. SoundExchange contends that this 

purported revenue shortfall is due to 

revenue exclusions that Sirius XM 

makes under the current Gross Revenues 

definition which, SoundExchange 

argues, should not be allowed to 

continue in the new licensing period. 

SoundExchange is particularly critical 

of a provision of the current definition 

that allows Sirius XM to deduct 

revenues received for ‘‘[c]hannels, 

programming products and/or services 

offered for a separate charge where such 

channels use only incidental 

performances of sound recordings.’’ 37 

CFR 382.11 (paragraph (3)(vi)(B) of 

Gross Revenues definition). According 

to SoundExchange, this deduction is 

unwarranted for the new licensing 

period, because the rates that Dr. 

Ordover proposed on behalf of 

SoundExchange and those that Dr. Noll 

proposed on behalf of Sirius XM reflect 

that roughly half of the value of Sirius 

XM’s SDARS service is derived from its 

music programming and roughly half 

from its non-music programming. 

According to SoundExchange, the 

reduction for non-music programming 

permitted in the current Gross Revenues 

definition is already built into the 

proposed rates and should not be 

further reduced from revenue. SX PFF 

¶¶ 839, 845–846. 

Further, SoundExchange charges that 

exclusion of revenue derived from nonmusic channels encourages 

manipulation to reduce the royalty base 

in unprincipled ways. For example, 

Sirius XM theoretically could 

disaggregate its bundled subscription 

price of $14.49 per month into a music 

package valued at $3.00 and a nonmusic package valued at $11.49. 

According to SoundExchange, such a 

disaggregation would result in no 

additional Sirius XM revenues from the 

separate packages, but would enable 

Sirius XM to reduce substantially its 

royalty obligation. SX PFF ¶¶ 852–853. 

SoundExchange suggests that its 

proposed Gross Revenues definition 

would help prevent such accounting 

gimmicks. 

SoundExchange also proposes to 

eliminate from the current Gross 

Revenues definition a provision that 

authorizes an exclusion from revenues 

received from channels and 

programming that are licensed outside 

the Sections 112 and 114 licenses, 

which includes pre-1972 recordings. 37 

CFR 382.11 (paragraph (3)(vi)(D) of 

Gross Revenues definition). Dr. Lys 

testified that Sirius XM excludes 

between 10% and 15% of its 

subscription revenue from the royalty 

base for performances of pre-1972 

recordings, thereby reducing its royalty 

obligation. Lys WRT at 54, SX Trial Ex. 

240. Yet, SoundExchange contends that 

Sirius XM has not identified the process 

it uses to identify pre-1972 recordings, 

or how it calculates the deduction it 

takes. 

SoundExchange’s proposed Gross 

Revenues definition also would 

eliminate five other exclusions from 

revenues permissible under the current 

regulations. First, under the proposed 

definition, revenues Sirius XM receives 

from its webcasting service, which are 

currently linked to the SDARS satellite 

radio subscription, would be included 

in the proposed new Gross Revenues 

definition. Second, revenues 

attributable to data services, such as 

Sirius XM’s weather and traffic services 

which can be purchased on a standalone basis but are more commonly 

offered to SDARS subscribers at a 

discount, would be included in the 

proposed new Gross Revenues 

definition. Third, revenue attributable to 

equipment sales or leases used to 

receive or play the SDARS service, 

would be included. Fourth, the current 

exclusions for credit card fees and bad 

mstockstill on DSK4VPTVN1PROD with RULES3

23072 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

45 In SDARS–I, the Judges expressly recognized an 

exclusion from Gross Revenues for so-called nonmusic services, characterized as ‘‘channels, 

programming, products and/or other services 

offered for a separate charge where such channels 

use only incidental performances of sound 

recordings.’’ SDARS–I, 73 FR 4102 (citing 37 CFR 

382.11, definition of Gross Revenues). The Judges 

did so because this exclusion ‘‘unambiguously 

relat[ed] the fee to the value of the sound recording 

performance rights at issue * * *’’ Id. at 4088. 

SoundExchange argues that if the current exclusion 

is allowed to continue, it would result in a double 

deduction from Sirius XM’s royalty obligation 

because Dr. Ordover’s proposed marketplace 

benchmarks exclude the value of non-music 

services, and Dr. Noll’s proffered benchmarks 

attempt to account for the fact that roughly half of 

Sirius XM’s service is non-music. SX PFF ¶¶ 842– 

846. The Judges agree with Sirius XM’s counter 

argument that Dr. Ordover’s modeling allocated 

revenues for both the music and non-music 

programming for Sirius XM’s standard ‘‘Select’’ 

package, ‘‘but that allocation in no way relates to 

the separately priced non-music packages offered 

by Sirius XM that are the subject of the exemption.’’ 

Sirius XM RFF ¶ 167. The Judges stress, however, 

that the exclusion is available only to the extent 

that the channels, programming, products and/or 

other services are offered for a separate charge. 

debt expense would be eliminated. 

Fifth, fees that Sirius XM collects for 

various activities related to customer 

account administration, such as 

activation fees, invoice fees, swap fees, 

and certain early termination fees, 

would be included in Gross Revenues. 

Bender WDT at 16–17, SX Trial Ex. 75. 

According to Sirius XM, the elimination 

of these exclusions could expand its 

annual revenue base, against which 

royalties are calculated, by over $300 

million. Frear WRT at 7, SXM Reb. Trial 

Ex. 1. 

2. Analysis and Conclusions 

In SDARS–I, the parties were at 

loggerheads over the definition of Gross 

Revenues, with SoundExchange 

favoring an expansive reading to 

include ‘‘all revenue paid or payable to 

an SDARS service that arise from the 

operation of an SDARS service.’’ See 73 

FR at 4087 (citation omitted). The 

SDARS in turn argued for adoption of 

the existing Gross Revenues definition 

for PSS. Id. With one exception, the 

Judges adopted the SDARS proposal. 

See id. SoundExchange’s new proposal 

is again a request for an expansive 

reading of gross revenues. In its effort to 

respond to the Judges’ criticism of its 

SDARS–I proposal as possessing ‘‘scant 

evidentiary support,’’ SoundExchange 

attempts to demonstrate how Sirius XM 

has under-reported revenues in the 

current licensing period. Alternatively, 

SoundExchange attempts to 

demonstrate how Sirius XM might 

manipulate its revenue base to lower its 

royalty obligation. With the exception of 

revenue deductions for privately 

licensed and pre-1972 sound recordings 

discussed, infra, both of 

SoundExchange’s arguments lack merit. 

SoundExchange’s argument that 

Sirius XM has paid roughly 16%–23% 

less in royalties in the current license 

period than was intended under the 

current Gross Revenues definition 

depends on the assumption that there is 

a direct link between that definition and 

the adjusted interactive subscription 

service benchmark that 

SoundExchange’s expert economist, Dr. 

Janusz Ordover, presented in SDARS–I. 

SoundExchange reasons that because 

the Ordover benchmark was fashioned 

from interactive service license 

agreements that generally provided for 

inclusion of mostly all of subscriber 

revenue, it must be the case that the 

Judges intended the SDARS–I rates to 

apply to total subscription revenues. See 

Bender WDT at 6–7, SX Trial Ex. 75. 

The presumed linkage between the 

benchmark and the Gross Revenues 

definition is not supported by the 

SDARS–I decision for at least two 

reasons. First, the Ordover benchmark 

was only one factor the Judges used to 

establish a zone of reasonable royalty 

rates, marking the upper boundary. 

Second, the Judges never adopted the 

revenue definitions contained in the 

subscription service license agreements 

that Dr. Ordover proffered. The Gross 

Revenues definition the Judges adopted 

in SDARS–I was quite different from 

those contained in the Ordover 

benchmark license agreements. 

In defining Gross Revenues, the 

Judges plainly stated that it was their 

intention to unambiguously relate the 

fee charged for a service that an SDARS 

provided to the value of the sound 

recording performance rights covered by 

the statutory licenses. SDARS–I, 73 FR 

at 4087. This relationship is especially 

important where, as here, the Judges 

adopt a percentage of revenue rather 

than a per-performance rate. The license 

agreements used in the SDARS–I 

Ordover benchmark do not provide for 

this connection between revenue and 

value under the statutory licenses. In 

sum, SoundExchange’s perceived 

linkage between the current Gross 

Revenues definition and the SDARS–I 

Ordover benchmark favoring inclusion 

of total subscriber revenues is simply 

not there. 

In the alternative, SoundExchange 

argues that an expansive revenue base is 

easier to administer and reduces the 

chances for manipulation. Dr. Lys 

testified that, from an accounting 

perspective, it is preferable to base 

contracts on a financial definition that 

is clear-cut to administer and easy to 

audit, and that a revenue definition that 

is all-inclusive satisfies this preference. 

Lys WRT at 53, SX Trial Ex. 240. While 

this may be true, the Judges are driven 

by the admonition in SDARS–I to 

include only those revenues related to 

the value of the sound recording 

performance rights at issue in this 

proceeding. SDARS–I, 73 FR at 4087. 

The Judges are satisfied that the 

exclusions permitted in the current 

Gross Revenues definition remain 

proper. However, if any party were to 

present evidence to demonstrate 

conclusively that one or more of the 

exclusions facilitates manipulation of 

fees for the sole purpose of reducing or 

avoiding Sirius XM’s statutory royalty 

obligation, then an amendment or 

elimination of the exclusion might be 

warranted. SoundExchange has failed to 

meet this burden and has only offered 

speculation as to how Sirius XM might 

manipulate its revenue to reduce its 

royalty obligation. With the exception of 

the two deductions discussed below, 

SoundExchange has failed to present 

persuasive evidence that would warrant 

the changes it proposes to the 

calculation of gross revenues.45

B. Deductions for Directly Licensed and 

Pre-1972 Recordings 

Separate from the issue of exclusions 

from the Gross Revenues definition, the 

Judges examine the impact on the 

royalty calculus of the performance by 

Sirius XM of sound recordings that it 

has directly licensed from record labels. 

To broadcast the music offered by the 

Direct Licensors, Sirius XM can rely on 

the agreed terms instead of paying 

under the compulsory statutory 

licenses. Sirius XM also performs other 

sound recordings that are exempt from 

the compulsory licenses in the 

Copyright Act (i.e., pre-1972 

recordings). 

1. Directly Licensed Recordings 

Both the Section 112 and Section 114 

licenses recognize and permit the 

licensing of sound recordings through 

private negotiation. 17 U.S.C. 112(e)(5), 

114(f)(3). The parties concede that 

directly licensed recordings are outside 

and, therefore, not compensable under 

the statutory licenses. Sirius XM 

contends that an exclusion from the 

Gross Revenues definition is necessary 

for directly licensed recordings; 

otherwise, it contends, it would be 

paying twice for performing these 

works. Sirius XM PFF ¶ 425; Proposed 

Rates and Terms of Sirius XM Radio, 

Inc., at 3 (Sept. 26, 2012). 

SoundExchange acknowledges that 

directly licensed recordings must be 

accounted for, but resists a codified 

deduction from the Gross Revenues 

definition. Instead, it proposes that the 

payable statutory royalty amount be 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23073 

46SoundExchange conditions the availability of 

its approach on the presumption that the music 

channels on the Internet service remain 

representative of the music channels offered on the 

SDARS service. 

47SoundExchange requests that, if its approach is 

adopted, Sirius XM be required to notify 

SoundExchange monthly of each copyright owner 

from which Sirius XM claims to have a direct 

license and each sound recording Sirius XM claims 

to be excludable. SoundExchange would then be 

permitted to disclose this information to confirm 

whether the direct license exists and the claimed 

sound recordings are properly excludable. 

48 In doing so, the Judges also accept 

SoundExchange’s request that the Direct License 

Share deduction only be available if the music 

channels available on Sirius XM’s Internet webcast 

service remain representative of the music channels 

offered on the SDARS services. 

49This language is the same that Sirius XM 

proposes be applicable to directly licensed sound 

recordings. 

determined by reducing the product of 

the royalty rate and Gross Revenues by 

a percentage approximating the value of 

the directly licensed usage. Second 

Revised Proposed Rates and Terms of 

SoundExchange, Inc., at 4 (Sept. 26, 

2012). To determine the share of 

performances attributable to direct 

licenses, SoundExchange proposes 

using data from Sirius XM’s Internet 

webcasting service for music. The 

following calculation would then be 

made: 

• For each month, identify the 

Internet webcast channels offered by the 

Licensee that directly correspond to 

music channels offered on its SDARS 

that are capable of being received on all 

models of Sirius radio, all models of XM 

radio, or both (the ‘‘Reference 

Channels’’).46

• For each month, divide the Internet 

performances of directly licensed 

recordings on the Reference Channels 

by the total number of Internet 

performances of all recordings on the 

Reference Channels to determine the 

Direct Licensing Share. 

Id. at 4–5 (footnote omitted).47

The Judges are persuaded that directly 

licensed recordings should not be a part 

of the calculus in determining the 

monthly statutory royalty obligation. To 

include those recordings, for which 

Sirius XM pays under a separate 

contract would effectively result in a 

double payment for the directly licensed 

recordings and would discourage, if not 

altogether eliminate, the incentive to 

enter into such direct licenses. 

Discouraging direct licensing would be 

inconsistent with Section 114 which 

recognizes, if not encourages, private 

licenses. See 17 U.S.C. 114(f)(1)(B). The 

Judges are not persuaded, however, by 

Sirius XM’s position that the exclusion 

of directly licensed recordings should 

be from Gross Revenues, as opposed to 

a deduction from the total royalty 

obligation. 

As SoundExchange correctly points 

out, there is no revenue recognition 

associated with directly licensed 

recordings. Those licenses represent a 

cost to Sirius XM. Bender WRT at 3, SX 

Trial Ex. 239. Sirius XM has not 

proposed a revenue allocation formula 

between directly licensed and 

statutorily licensed recordings that it 

performs on its SDARS service; it has 

presented a usage deduction that it 

seeks to apply to its revenue base. 

Excluding usage of sound recordings 

from Gross Revenues would not 

comport with the Judges’ preference to 

relate royalty fees to the value of the 

sound recording performance rights that 

give rise to the royalty obligation. 

The Judges are persuaded that the 

proposed methodology of 

SoundExchange to calculate the royalty 

deduction for directly licensed 

recordings (i.e. the ‘‘Direct License 

Share’’) is the superior approach 

because it would allow Sirius XM to 

determine the percentage reduction for 

directly licensed recordings based upon 

the number of plays of those recordings 

compared to total plays. Despite the 

Judges’ requests, Sirius XM and its 

contractor, Music Reports, Inc., were 

incapable of providing the Judges with 

accurate data as to the identity and 

volume of directly licensed recordings 

on the SDARS service. SX PFF ¶¶ 883, 

886–888. Reasonable accuracy and 

transparency are required for 

calculation of the Direct License Share, 

and SoundExchange has demonstrated 

that its proposed use of the Sirius XM 

webcasting service as a proxy satisfies 

these requirements. The Judges adopt 

SoundExchange’s Direct License Share 

approach.48

2. Pre-1972 Recordings 

The performance right granted by the 

copyright laws for sound recordings 

applies only to those recordings created 

on or after February 15, 1972. Sound 

Recording Amendment, Public Law 92– 

140, 85 Stat. 391 (1971). Sirius XM 

broadcasts pre-1972 recordings on its 

SDARS service and, in the present 

license period, excludes a portion of 

revenues from its Gross Revenues 

calculation for such use. The current 

Gross Revenues definition does not 

expressly recognize such an exclusion, 

which is not surprising given that there 

is no revenue recognition for the 

performance of pre-1972 works. In 

taking the exclusion, Sirius XM 

apparently relies upon the provision of 

the current Gross Revenues definition 

that permits an exclusion for 

programming that is exempt from any 

license requirement. See 37 CFR 382.11 

(paragraph (3)(vi)(D) of Gross Revenues 

definition). 

Dr. Lys testified that the deduction is 

between 10% and 15% of subscription 

revenue, a figure that Sirius XM did not 

dispute. Lys WRT at 54, SX Trial Ex. 

240. Sirius XM requests that the Judges 

amend the current Gross Revenues 

definition to provide that its ‘‘monthly 

royalty fee shall be calculated by 

reducing the payment otherwise due by 

the percentage of Licensee’s total 

transmission of sound recordings during 

the month that are exempt from any 

license requirement or separately 

licensed.’’ Proposed Rates and Terms of 

Sirius XM Radio Inc. at 3 (Sept. 26, 

2012).49

As with directly licensed works, pre1972 recordings are not licensed under 

the statutory royalty regime and should 

not factor into determining the statutory 

royalty obligation. But, for the same 

reasons discussed in relation to the 

Direct Licenses, revenue exclusion is 

not the proper means for addressing pre1972 recordings. Rather, the proper 

approach is to calculate a deduction 

from the total royalty obligation to 

account for performances of pre-1972 

recordings. The question then becomes 

how to calculate the correct deduction. 

Sirius XM did not offer any evidence as 

to how it calculated its current 

deduction, or how it identified what 

recordings performed were pre-1972, 

other than the obtuse assertion of Mr. 

Frear that the lawyers talked to the 

finance team to assure a proper 

deduction. 8/13/12 Tr. 3125:3–3126:3 

(Frear). To be allowable, a deduction for 

pre-1972 recordings must be precise and 

the methodology transparent. The 

Judges, therefore, adopt the same 

methodology applied to determining the 

Direct License Share, utilizing as a 

proxy the Sirius XM webcasting data 

with the accompanying restriction, to 

pre-1972 recordings. To be eligible for 

deduction of the Pre-1972 Recording 

Share, Sirius XM must, on a monthly 

basis, identify to SoundExchange by 

title and recording artist those 

recordings for which it is claiming the 

deduction. 

VII. Terms 

The Judges now turn to the terms 

necessary to effectuate payment and 

distribution. The Judges’ mandate is this 

regard is to adopt terms that are 

practical and efficient. See SDARS–I, 73 

FR at 4098. In general, the Judges seek, 

where possible, consistency across 

licenses to promote efficiency and 

mstockstill on DSK4VPTVN1PROD with RULES3

23074 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

50Sirius XM proposes to amend current 

§ 382.13(c) in a manner that would ensure that 

Sirius XM would not have to report either actual 

total performances of sound recordings or Aggregate 

Tuning Hours as required under the applicable 

notice and recordkeeping requirements in Part 370. 

Sirius XM PFF ¶ 413; Proposed Rates and Terms of 

Sirius XM Radio Inc., at 5 (Sept. 26, 2012). 

SoundExchange’s proposed reply findings do not 

address this suggested change. The Judges decline 

to adopt this proposal because it appears for the 

first time in Sirius XM’s Proposed Findings of Fact 

‘‘without any citation to the record or any 

substantive explanation as to why such a change is 

needed or what benefits would result from its 

adoption.’’ Webcasting III, 76 FR at 13043 (Mar. 9, 

2011). 

minimize costs in administering the 

licenses. However, this goal is not 

overriding. See Webcasting III, 76 FR 

13026, 13042 (Mar. 9, 2011). 

A. Collective 

SoundExchange requests to be 

retained as the sole collective for the 

collection and distribution of royalties 

paid by the PSS and SDARS under the 

Sections 112 and 114 licenses for the 

license period 2013–17. The PSS and 

SDARS do not oppose SoundExchange’s 

request. Therefore, SoundExchange will 

serve as the collective for the 2013–17 

license period. 

B. Terms Relating to PSS 

SoundExchange proposes a number of 

substantive and nonsubstantive changes 

to the current regulations dealing with 

PSS. Music Choice opposes the changes, 

some in general terms and some 

specifically. 

1. Reorganizing Definitions 

SoundExchange proposes collecting 

applicable PSS definitions in one place 

for the convenience of the users of the 

definitions. SX PFF ¶ 906. We believe 

this proposal, which is nonsubstantive 

and which Music Choice does not 

appear to oppose specifically, will 

enhance the utility of the rules and 

therefore is adopted. 

2. Relocating the Statement of Account 

Requirement 

SoundExchange proposes relocating 

the statement of account requirement in 

current § 382.4(b) and to adapt it to 

include the enumerated data elements 

from the SDARS regulations. SX PFF 

¶ 908; Bender WDT at 22, SX Trial Ex. 

75. Music Choice appears not to 

specifically oppose this change. This 

change would promote clarity of what 

information is required in a statement of 

account and is consistent with the 

SDARS license. Therefore, the Judges 

adopt it to enhance the utility and 

uniformity of the rules across licenses. 

3. Applying Late Fee to Late Statement 

of Account 

SoundExchange proposes applying a 

late fee to a late statement of account, 

to make the PSS rules consistent with 

the SDARS and webcasting regulations. 

SX PFF ¶ 907. Music Choice opposes 

this proposed change, contending that 

SoundExchange has not provided any 

evidence suggesting that Music Choice 

or Muzak has ever failed to submit a 

statement of account in a timely 

manner. Music Choice PFF ¶ 603. The 

Judges previously imposed a late fee for 

late statements of account despite the 

service’s record of timely submitted 

statements of account, reiterating the 

importance of the timely submission of 

statements of account to the quick and 

efficient distribution of royalties. 

SDARS–I, 73 FR at 4100; see also, 

Webcasting II, 72 FR at 24107. The 

Judges adopt the proposed late fee 

under the same reasoning. The late fee 

adopted today is consistent with the one 

imposed on webcasters and the SDARS. 

See SDARS–I, 73 FR at 4100. 

4. Clarifying Unclaimed Funds 

Provisions 

SoundExchange proposes to conform 

and cross-reference regulations dealing 

with the use of funds where the 

Collective is unable to locate a copyright 

owner or performer who may be entitled 

to those funds. SX PFF ¶ 909. Because 

this proposal is unopposed and would 

enhance the clarity of the rules the 

Judges adopt it. On a related matter, the 

Judges encourage SoundExchange to 

provide greater clarity on what date it 

uses as the ‘‘date of distribution’’ for 

unclaimed funds. See, e.g., Proposed 37 

CFR 382.8. 

5. Changing Confidentiality Provisions 

SoundExchange proposes changes to 

the confidentiality provisions in § 382.5 

to make the PSS regulations consistent 

with those for Business Establishments. 

SX PFF ¶ 910. Music Choice specifically 

opposes this proposal because it 

believes it could cause Music Choice’s 

confidential information to be provided 

to its competitors. Music Choice PFF 

¶ 609. In light of Music Choice’s specific 

opposition and SoundExchange’s 

inadequate justification for adopting the 

rule the Judges refrain from adopting 

this proposed change. 

6. Conforming Audit Processes 

SoundExchange proposes conforming 

the PSS audit provisions in current 

§§ 382.5(f) (Verification of statements of 

account) and 382.6(f) (Verification of 

royalty payments) with those applicable 

to SDARS and webcasters. SX PFF 

¶ 911. SoundExchange does not support, 

however, maintaining consistency 

across licenses with respect to the cost 

shifting provisions (currently 5% 

variance for PSS and 10% variance for 

SDARS and webcasters) and would 

prefer no change to one that would 

include cost shifting conformity to the 

higher variance standard. Music Choice 

specifically opposes the proposed 

changes, arguing, among other things, 

that it would permit SoundExchange to 

use auditors that are employees or 

officers of a sound recording owner or 

performing artists, the objectivity of 

which might be suspect. Music Choice 

PFF ¶ 611–613. Given Music Choice’s 

concerns, which SoundExchange has 

not adequately addressed, and 

SoundExchange’s own reluctance to 

adopt conforming provisions unless the 

provisions maintain differences in cost 

shifting (or the lower variance 

standard), the Judges refrain from 

adopting the proposed changes to the 

auditing provisions. To the extent that 

one or more of the parties have specific 

or general concerns about the auditing 

process with respect to this or other 

licenses that the Judges administer, the 

Judges would welcome guidance that 

might serve to enhance the fairness and 

efficiency of the process. 

7. Technical and Conforming Changes 

SoundExchange also proposes a 

number of technical and conforming 

changes, which the Judges adopt as 

proposed with one exception. SX PFF 

¶ 912. In particular, the Judges adopt 

SoundExchange’s proposal to relocate 

the provision regarding retention of 

records from its current location in 

§ 382.4(f) relating to confidential 

information to newly renumbered 

§ 382.4(e), which now houses the terms 

of the license. However, the Judges 

decline to adopt the proposed language 

because it would be a substantive 

change for which SoundExchange 

provides no justification. Therefore, the 

language in new § 382.4(e) remains the 

same as that currently found in 

§ 382.4(f). 

C. Terms Relating to SDARS 

SoundExchange proposes a number of 

substantive and nonsubstantive changes 

to the current regulations dealing with 

SDARS.50 Sirius XM opposes the 

changes, some in general terms and 

some specifically. 

1. Deleting Residential Subscriber 

Concept 

SoundExchange proposes deleting the 

concept of ‘‘residential’’ SDARS 

subscriber in §§ 382.11 and 382.12 of 

the current regulations. The concept 

appears in the definitions of ‘‘Gross 

Revenues’’ and ‘‘Residential.’’ 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23075 

51 76 FR at 13045. 

52SoundExchange also proposes a number of 

minor technical and conforming changes, which, it 

represents, are unopposed. SX PFF ¶¶ 902–903. 

Because these proposed changes promote 

efficiency, the Judges adopt them. 

53 I do concur with the decision to maintain the 

current definition of Gross Revenues for the PSS for 

the upcoming licensing term. 

SoundExchange contends that the 

concept is a ‘‘confusing artifact of’’ a 

comparable term used in the PSS 

regulations. SX PFF ¶ 900. 

SoundExchange argues that the SDARS 

service is not primarily residential in 

terms of being delivered to homes and 

the term ‘‘residential subscriber’’ simply 

means a subscriber and, therefore, the 

term ‘‘residential’’ adds no value to the 

definition and creates the possibility for 

confusion. Id., citing Bender WDT at 20, 

SX Trial Ex. 75. Although Sirius XM 

broadly opposes adopting the changes to 

terms SoundExchange proposes, it does 

not expressly state its reasons for 

opposing this particular change. Given 

the broad analysis of the definition of 

‘‘Gross Revenues’’ the Judges have 

undertaken in this determination, we 

are mindful of SoundExchange’s 

concern that potentially modifying that 

definition with the preceding term 

‘‘residential’’ in current § 382.12 could 

cause unnecessary confusion. Therefore, 

the Judges adopt SoundExchange’s 

proposal to delete the definition of 

‘‘residential’’ from current § 382.11 and 

the reference to ‘‘residential’’ in current 

§ 382.12(a). 

2. Eliminating the Handwritten 

Signature Requirement for Statements of 

Account 

SoundExchange proposes that the 

Judges eliminate a requirement in 

current § 382.13(e)(3) that the signature 

on a statement of account be 

handwritten. SX PFF ¶ 901. 

SoundExchange contends that the 

current requirement hinders 

SoundExchange in its ability to 

automate the process of ‘‘ingesting 

statements of account and reports of 

use,’’ which would help reduce 

transaction costs. Id. Sirius XM does not 

appear to oppose the request. Although 

the Judges rejected such a request in 

Webcasting III due largely to the 

proposal’s inconsistency with certain 

agreements we adopted in connection 

with the Webcasting III determination,51

the Judges find no such inconsistency 

here. See Bender WDT at 20–21, SX 

Trial Ex. 75. In light of desirability of 

managing administrative costs and the 

apparent lack of opposition to the 

proposal, the term is adopted as 

proposed.52

3. Applying Late Fee to Late Statement 

of Account 

SoundExchange proposes to amend 

the current late fee requirements for 

statements of account, 37 CFR 

382.13(d), by conforming the language 

to that adopted by the Judges in 

Webcasting III, which SoundExchange 

contends would eliminate confusion 

that could result from the current 

language. See SX RFF ¶¶ 360–363. 

Sirius XM objects to this proposed 

change arguing that the Judges’ 

justification for adoption of a late fee in 

SDARS–I—to ‘‘aid the efficient 

distribution of royalties’’—no longer 

exists now that Sirius XM is the only 

SDAR and its statement of account 

provides no ‘‘additional information 

that would impact SoundExchange’s 

ability to distribute Sirius XM 

royalties.’’ Sirius XM PFF ¶ 449. In 

addition, Sirius XM proposes that the 

regulations be amended to ‘‘ensure that 

a single late fee is to be charged in a 

given reporting period only in the case 

of a late payment.’’ Id. 

In adopting a late fee for late 

statements of accounts in SDARS–I, the 

Judges explained that assessment of an 

additional late fee for a late statement of 

account would occur only when the 

royalty payment and statement of 

account were submitted separately and 

both were late; otherwise, a single late 

fee of 1.5% would cover both the late 

payment and statement of account when 

they were submitted together. See 

SDARS–I, 73 FR at 4100. The Judges 

find nothing in the record before us that 

would justify a change to this position; 

therefore, the Judges decline to adopt 

Sirius XM’s proposal. The Judges adopt 

SoundExchange’s proposed language 

because it eliminates any inconsistency 

in the current language. The proposed 

language provides consistency in the 

late fee provisions applicable to 

webcasters and the PSS. 

VIII. Final Determination 

This Final Determination sets rates 

and terms for Section 112 and Section 

114 royalties to be paid by PSS and 

SDARS for the compulsory ephemeral 

license and digital performance license, 

respectively. The Register of Copyrights 

may review the Judges’ final 

determination for legal error in 

resolving a material issue of substantive 

copyright law. The Librarian shall cause 

the Judges’ final determination for the 

two subject licenses for the period 

January 1, 2013, through December 31, 

2017, and any correction therefor by the 

Register, to be published in the Federal 

Register no later than the conclusion of 

the 60-day review period. 

So ordered. 

Suzanne M. Barnett, 

Chief Copyright Royalty Judge. 

Richard C. Strasser, 

Copyright Royalty Judge. 

Dated: February 14, 2013. 

Dissenting Opinion of Copyright 

Royalty Judge Roberts 

Judge Roberts, concurring with 

respect to the terms of payment for the 

PSS and SDARS, and dissenting with 

respect to the analysis and 

determination of the royalty rates. 

I concur with the analysis and 

determination of the terms for making royalty 

payments under the statutory licenses at 

issue in this proceeding, but not the 

definition of Gross Revenues to be applied to 

SDARS in determining the royalty fee, which 

I do not consider to be a term of payment.53

I dissent, however, from the majority’s 

evaluation and analysis of the evidence, and 

determination of rates for the PSS and 

SDARS. Rather than engage in a point-bypoint discussion and disagreement with the 

majority’s opinion, I set forth below— 

complete and original to me—what I believe 

is the proper analysis of the marketplace 

evidence submitted by the parties for the PSS 

and SDARS rates, the application of the 

Section 801(b) factors, and the determination 

of the rates, including the Gross Revenues 

definition for SDARS. 

I. Introduction 

A. Subject of the Proceeding 

This is a rate determination 

proceeding convened by the Copyright 

Royalty Judges under 17 U.S.C. 803(b) et 

seq., and 37 CFR part 351 et seq., to 

establish rates and terms for the digital 

performance of sound recordings by 

preexisting subscription services 

(‘‘PSS’’) and preexisting satellite digital 

audio radio services (‘‘SDARS’’) for the 

license period 2013 through 2017. The 

Digital Performance Right in Sound 

Recordings Act of 1995, as amended by 

the Digital Millennium Copyright Act of 

1998, grants to sound recording 

copyright owners an exclusive right to 

publicly perform sound recordings by 

digital audio transmission, subject to the 

statutory licenses set forth in 17 U.S.C. 

112(e) and 114(f)(1) of the Copyright 

Act. The rates and terms set forth in this 

Determination are for these statutory 

licenses. 

B. Parties to the Proceeding 

The parties to this proceeding are: (1) 

SoundExchange, Inc. 

(‘‘SoundExchange’’); (2) Music Choice, 

Inc. (‘‘Music Choice’’); and (3) Sirius 

XM, Inc. (‘‘Sirius XM’’). SoundExchange 

is a Section 501(c)(6) nonprofit 

mstockstill on DSK4VPTVN1PROD with RULES3

23076 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

performance rights organization that 

collects and distributes royalties 

payable to performers and sound 

recording copyright owners for the use 

of sound recordings over satellite radio, 

the Internet, wireless networks, and 

cable and satellite television networks 

via digital audio transmissions. Bender 

WDT at 2, SX Trial Ex. 75. Music Choice 

(formerly Digital Cable Radio 

Associates) provides residential music 

service to subscribers of cable 

television. Del Beccaro Corrected WDT 

at 3, PSS Trial Ex. 1. Sirius XM provides 

satellite radio service broadcasts of 

music and non-music content on a 

subscription-fee basis throughout the 

continental United States. Meyer WDT 

at 4, SXM Dir. Trial Ex. 5. 

C. Procedural History 

On January 5, 2011, the Copyright 

Royalty Judges issued a Notice 

announcing commencement of this 

proceeding and requesting the 

submission of Petitions to Participate. 

75 FR 455. Petitions to Participate were 

received and accepted from the abovedescribed parties. When the negotiation 

period provided by 17 U.S.C. 803(b)(3) 

failed to yield any agreements, the 

Judges called for the submission of 

written direct statements, which were 

received by the November 29, 2011 

deadline. Hearings on the written direct 

testimony were conducted from June 5, 

2012 through June 18, 2012. Eight 

witnesses presented testimony on behalf 

of SoundExchange, three on behalf of 

Music Choice, and nine on behalf of 

Sirius XM. 

On July 2, 2012, the participants filed 

their written rebuttal statements. 

Witness testimony in the rebuttal phase 

began on August 13, 2012, and 

concluded on August 23, 2012. Nine 

witnesses presented testimony on behalf 

of SoundExchange, two on behalf of 

Music Choice, and five on behalf of 

Sirius XM. After close of the rebuttal 

phase, the parties filed their proposed 

findings of fact and conclusions of law 

on September 26, 2012, and their reply 

findings and conclusions on October 12, 

2012. 

On October 16, 2012, the Judges heard 

closing arguments, wherein the record 

to this proceeding was closed. The 

record contains several thousands of 

pages of testimony, exhibits, pleadings, 

motions and orders. 

II. The Standard for Determining 

Royalty Rates 

Section 801(b)(1) of the Copyright 

Act, 17 U.S.C., provides that the 

Copyright Royalty Judges shall ‘‘make 

determinations and adjustments of 

reasonable terms and rates of royalty 

payments’’ for the statutory licenses set 

forth in Sections 114(f)(1) and 112(e). 

The Section 114(f)(1) digital 

performance license for the PSS and 

SDARS, and the Section 112(e) 

ephemeral license, contain similarities 

and important differences in their 

standards for setting royalty rates. Both 

require the determination of reasonable 

rates and terms; however, the digital 

performance license, in Section 

801(b)(1), requires that the rates (but not 

the terms) be calculated to achieve the 

following objectives: 

• To maximize the availability of 

creative works to the public. 

• 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. 

• 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. 

• 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). The Section 112(e) 

ephemeral license requires the Judges to 

‘‘establish rates that most clearly 

represent the fees that would have been 

negotiated between a willing buyer and 

a willing seller,’’ and further directs 

that: 

• [T]he Copyright Royalty Judges 

shall base their decision on economic, 

competitive, and programming 

information presented by the parties, 

including— 

Æ whether use of the service may 

substitute for or may promote the sale 

of phonorecords or otherwise interferes 

with or enhances the copyright owner’s 

traditional streams of revenue; and 

Æ the relative roles of the copyright 

owner and the transmitting organization 

in the copyrighted work and the service 

made available to the public with 

respect to relative creative contribution, 

technological contribution, capital 

investment, cost, and risk. 

17 U.S.C. 112(e)(4). The ephemeral 

license requires adoption of a minimum 

fee for each type of service offered by a 

transmitting organization, while the 

digital performance license does not. 17 

U.S.C. 112(e)(3). Both licenses provide 

that the Judges may consider the rates 

and terms of voluntary license 

agreements negotiated under the 

licenses. 17 U.S.C. 112(e)(4), 114(f)(1). 

It is evident from the presentations of 

the parties that it is the Section 114(f)(1) 

license that is of the greater value and 

concern to their interests, as it was 

when the Judges last considered the two 

licenses in 2007. In that Determination, 

the Judges set forth in great detail the 

historical treatment of these factors by 

the Copyright Royalty Tribunal and the 

Librarian of Congress in his 

administration of the Copyright 

Arbitration Royalty Panel system, and I 

will not repeat them here. See, SDARS– 

I, 73 FR 4080, 4082–84 (Jan. 24, 2008). 

Consideration of this history produced 

the following approach: 

[T]he path for the Copyright Royalty Judges 

is well laid out. We shall adopt reasonable 

royalty rates that satisfy all of the objectives 

set forth in Section 801(b)(1)(A)–(D). In doing 

so, we begin with a consideration and 

analysis of the benchmarks and testimony 

submitted by the parties, and then measure 

the rate or rates yielded by that process 

against the statutory objectives to reach our 

decision * * *. 

We reject the notion, however, that Section 

801(b)(1) is a beauty pageant where each 

factor is a stage of competition to be 

evaluated individually to determine the stage 

winner and the results aggregated to 

determine an overall winner. Neither the 

Copyright Royalty Tribunal nor the Librarian 

of Congress adopted such an approach. 

Rather, the issue at hand is whether these 

policy objectives weigh in favor of 

divergence from the results indicated by the 

benchmark marketplace evidence. 

Id. at 4084, 4094 (citations omitted). The 

same approach was used by the Judges 

in determining royalty rates for the 

Section 115 mechanical license, the 

only proceeding involving the Section 

801(b)(1) factors decided since SDARS– 

I. See, Phonorecords I, 74 FR 4510 (Jan. 

26, 2009). None of the parties in this 

proceeding contend that this approach 

is erroneous or must be abandoned. 

Music Choice, however, argues that 

there is an additional factor that must be 

considered by the Judges, applicable 

only to the PSS rate, that operates as a 

limitation on the Judges’ consideration 

of the benchmark evidence. After a 

lengthy discussion of the Librarian of 

Congress’s PSS–I determination, and 

citation to the 17 U.S.C. 803(a)(1) 

proscription that the Judges must act on 

the basis of prior determinations of the 

Librarian of Congress, Music Choice 

contends that the Librarian’s use of the 

musical works benchmark (i.e., the 

royalty rates paid by Music Choice to 

the performing rights societies—ASCAP, 

BMI and SESAC) in 1998 operates as 

legal precedent in this proceeding and 

must ‘‘be used in the absence of any 

better comparable benchmark.’’ Music 

Choice PCL ¶ 53. Thus, under Music 

Choice’s formulation, the Judges’ 

benchmark analysis must begin with the 

current royalty fees paid by Music 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23077 

54The PSS are Music Choice and Muzak. Muzak’s 

PSS service is, apparently, only a small part of its 

business, and it did not participate in this 

proceeding. Digital Music Express, Inc., which was 

a PSS in PSS–I, ceased operation in 2000. 

55The current regulation defining Gross Revenues 

for PSS is set forth in 37 CFR 382.2(e). 

56The Judges have stated a decided preference for 

per-performance royalty rates for statutory licenses, 

rather than rates as a percentage of revenue, because 

that metric most unambiguously relates the fee to 

the value of the right licensed. 73 FR at 4087. We 

adopted percentage-of-revenue royalty rates in 

SDARS–I, however, because of intractable problems 

associated with measuring usage and listenership to 

performances of sound recordings. Id. at 4088. 

These problems continue to exist with respect to 

the PSS and SDARS, and the parties agree to a 

percentage-of-revenue royalty fee for both Section 

114 licenses. Given their agreement, and lack of 

evidence as to an alternative, I adopt that metric. 

57 I note that these percentage rates are quite 

similar to the maximum rates proposed by the 

services and record company copyright owners in 

PSS–I. See PSS–I, 63 FR 25394, 25395 (May 8, 

1998)(2.0% by the services and 41.5% by the record 

companies). 

Choice to the performing rights societies 

musical works and, in the absence of a 

superior benchmark, employ this 

benchmark for framing the applicable 

PSS royalty fee. 

I reject Music Choice’s argument for 

several reasons. First, Music Choice 

does not, and cannot, point to a single 

statutory license rate proceeding where 

a court, the Librarian or the Copyright 

Royalty Tribunal has ruled that a set of 

factual marketplace observations used 

by the decisionmaker in formulating a 

royalty fee for a particular proceeding 

must be given a priori consideration in 

a future proceeding. Second, a plain 

reading of PSS–I makes it clear that the 

Librarian did not rely solely upon the 

musical works benchmark, but instead 

relied upon some unspecified 

combination of that benchmark and the 

performance royalty rate contained in a 

partnership agreement between Music 

Choice and certain cable television 

operators and record companies that 

created Music Choice. PSS–I, 63 FR at 

25410. Even if I were inclined to accord 

some precedential value to the musical 

works benchmark in this proceeding— 

and I am not—I could not discern the 

degree to which that benchmark was 

influenced or altered by the Librarian’s 

inclusion of the partnership license. Id. 

at 25404 (‘‘The question, however, is 

whether this reference point [the 

musical works fees paid by Music 

Choice] is determinative of the 

marketplace value of the performance 

right in sound recordings; and, as the 

Panel determined, the answer is no.’’). 

And, third, Music Choice’s argument 

fails to place the PSS–I decision in its 

historical context. All that was available 

to the Librarian were the musical works 

fees paid to the performing rights 

societies and the partnership license 

agreement, an unsurprising 

circumstance given the newness of the 

statutory license, and the digital music 

marketplace in general. Concluding that 

selection of a factual market model from 

1998 somehow limits the 

decisionmakers’ consideration of the 

evidence in 2012 defies logic. I consider 

the musical works benchmark evidence 

offered by Music Choice in its normal 

course, discussed below, but it will not 

be given preference as a starting point, 

default position, or other limitation to 

my evaluation of the benchmark 

evidence. 

III. Determination of the Royalty Rates 

A. Application of Section 114 and 

Section 112 

Based upon the applicable law and 

relevant evidence received in this 

proceeding, the Copyright Royalty 

Judges must determine rates for the 

Section 114(f)(1) digital performance 

license for the only existing SDARS, 

Sirius XM, and the PSS.54 The Judges 

also must determine rates for the 

Section 112(e) ephemeral license for the 

PSS and SDARS. 

With respect to the Section 112(e) 

license, the Judges received a joint 

stipulation from the parties. 

SoundExchange and Music Choice ask 

for continued application of the 

language of 37 CFR 382.2(c), which 

requires a minimum fee advance 

payment of $100,000 per year, payable 

no later than January 20 of each year, 

with royalties paid during the year 

recoupable against the advance. Joint 

Stipulation at 2 (May 25, 2012). 

SoundExchange and Sirius XM ask that 

the same minimum fee proposal apply 

to Sirius XM. Id. For the Section 112(e) 

license fee, all parties request that 5% 

of the total royalties paid by the PSS 

and Sirius XM be attributable to the 

license, consistent with the current 

regulations applicable to webcasters, 

broadcasters, SDARS and new 

subscription services. 37 CFR 380.3, 

380.12, 380.22; 382.12; and 383.3. 

I accept the stipulations of the parties 

regarding the Section 112(e) rates, but 

not for the reason set forth by the 

majority (i.e., nothing else in the 

record). The stipulations in this 

proceeding and, for that matter, in prior 

proceedings involving the Section 

112(e) license, reflect the lack of 

marketplace evidence as to the value of 

the license in isolation from that of 

Section 114. This does not mean, 

however, that the Section 112(e) license 

is of no value because marketplace 

agreements package the rights conferred 

by the licenses together. The parties’ 

stipulations represent a reasonable 

attempt to identify the value of the 

Section 112(e) license if it were 

marketed separately to copyright users, 

and for that reason I find the 

stipulations acceptable. 

I now turn to what I view should be 

the appropriate rate structures for the 

Section 114(f)(1) license for the PSS and 

SDARS. 

B. The Rate Proposals of the Parties for 

the Section 114 License for the PSS 

Since 1998 when the decision in PSS– 

I established the initial royalty rates, 

Music Choice has paid a fee on a 

percentage basis of its Gross Revenues, 

as defined by regulation.55 Neither 

Music Choice nor SoundExchange 

propose altering this rate structure for 

the 2013–2017 license period,56 nor do 

they propose changes to the revenue 

definition. SoundExchange requests the 

following percentage rates for the PSS: 

for 2013: 15%; for 2014: 20%; for 2015: 

25%; for 2016: 35%; and for 2017: 45%. 

Second Revised Proposed Rates and 

Terms, at 6 (Sept. 26, 2012). 

SoundExchange also requests an 

additional aspect to the percentage of 

revenue metric to address what it 

perceives as a deliberate reduction in 

revenues paid to Music Choice for its 

residential audio service by certain 

cable operators that are co-owners 

(partners) of Music Choice. For 

transmissions through such a partner, 

SoundExchange asks that the total 

royalty fee not be less than the product 

of multiplying such partner’s total 

number of subscribers to Music Choice’s 

programming by the average persubscriber royalty payment that Music 

Choice makes for the top five highestpaying customers of Music Choice that 

are not its partners. Id. at 7. 

Music Choice requests a percentage of 

Gross Revenues of 2.6%, applicable to 

each of the years in the licensing 

period.57 Both SoundExchange and 

Music Choice ask that the definition of 

Gross Revenues, currently set forth in 37 

CFR 382.2(e), apply to the new licensing 

period. 

C. The Rate Proposals of the Parties for 

the Section 114 License for SDARS 

1. Proposed Rates and Structure 

While SoundExchange and Music 

Choice are content to operate mostly the 

same as in prior licensing periods (with 

the exception of royalty rates), there is 

not a similar level of harmony as to the 

specifics of the rate structure for 

SDARS. SoundExchange does 

recommend retention of the percentage 

mstockstill on DSK4VPTVN1PROD with RULES3

23078 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

of revenue metric, but seeks expansion 

of the revenue base, and proposes a 

methodology for exclusion of the value 

of privately negotiated digital 

performance licenses from the total 

statutory royalty fee. Second Revised 

Proposed Rates and Terms at 3–5 (Sept. 

26, 2012). Sirius XM favors maintenance 

of the current revenue definition and 

payment scheme. Sirius XM PFF at 203– 

204. 

As with the PSS, SoundExchange 

argues for an accelerating royalty rate 

during the five-year license period as 

follows: for 2013: 12%; for 2014: 14%; 

for 2015: 16%; for 2016: 18%; and for 

2017: 20%. Second Revised Proposed 

Rates and Terms, at 2 (Sept. 26, 2012). 

Sirius XM counters with a royalty rate 

in the range of 5% to 7% of Sirius XM’s 

monthly Gross Revenues, as currently 

defined in 37 CFR 382.11, applicable to 

each month of the upcoming licensing 

period. 

2. Proposed Definition of Gross 

Revenues 

The revenue base against which the 

adopted royalty rates shall be applied is 

a matter of considerable disagreement 

between the parties. Sirius XM requests 

continuance of the current definition of 

Gross Revenues found in 37 CFR 382.11, 

while SoundExchange favors a 

considerable expansion of the revenue 

base. SoundExchange would like to see 

Gross Revenues redefined as follows: 

1. Gross Revenues shall mean revenues 

recognized by the Licensee in accordance 

with GAAP from the operation of an SDARS 

in the U.S., and shall be comprised of the 

following: 

i. All subscription, activation, 

subscription-related and other revenues 

recognized by Licensee from fees paid or 

payable by or for U.S. subscribers to 

Licensee’s SDARS with respect to any and all 

services provided by the Licensee to such 

subscribers, unless excluded by paragraph 3 

below; 

ii. Licensee’s advertising revenues, or other 

revenues from sponsors, if any, attributable 

to advertising on channels of Licensee’s 

SDARS in the U.S. other than those that use 

only incidental performances of sound 

recordings, less advertising agency and sales 

commissions attributable to advertising 

revenues included in Gross Revenues; and 

iii. Revenues attributable to the sale, lease 

or other distribution of equipment and/or 

other technology for use by U.S. subscribers 

to receive or play the SDARS service, 

including any shipping and handling fees 

therefor. 

2. Gross revenues shall include such 

payments as set forth in paragraphs 1.i 

through iii of the definition of ‘‘Gross 

Revenues’’ to which Licensee is entitled but 

which are paid to a parent, subsidiary or 

division of Licensee. 

3. To the extent otherwise included by 

paragraph 1, Gross Revenues shall exclude: 

i. Royalties paid to Licensee by persons 

other than subscribers, advertisers and 

sponsors for intellectual property rights; 

ii. Revenues from the sale of phonorecords 

and digital phonorecord deliveries sold by 

Licensee (but not any affiliate fees or other 

payments by a third party for advertising of 

downloads sold by a third party); 

iii. Sales and use taxes; 

iv. Revenues recognized by Licensee for 

the provision of— 

A. Data services (e.g. weather, traffic, 

destination information, messaging, sports 

scores, stock ticker information, extended 

program associated data, video and 

photographic images, and such other 

telematics and/or data services as may exist 

from time to time, but not transmission of 

sound recording data), when such services 

are provided on a standalone basis (i.e. 

priced separately from Licensee’s SDARS, 

and offered at the same price both to 

subscribers to Licensee’s SDARS and persons 

who are not subscribers to Licensee’s 

SDARS); 

B. Channels, programming, products and/ 

or other services provided outside of the 

United States; and 

C. Separately licensed services, including 

webcasting, interactive services, 

transmissions to business establishments, 

and audio services bundled with television 

programming and subject to the rates 

provided in part 383, when such services are 

provided on a standalone basis (i.e. priced 

separately from Licensee’s SDARS, and 

offered at the same price both to subscribers 

to Licensee’s SDARS and persons who are 

not subscribers to Licensee’s SDARS). 

Id. at 2–3. 

Jonathan Bender, CEO of 

SoundExchange, testified that the 

proposed definition will correct the 

inequities of the current definition and, 

at the same time, allow for greater ease 

of administration. His premise is based 

upon an interpretation of the Judges’ use 

in SDARS–I of Dr. Ordover’s adjusted 

interactive subscription service 

benchmark to establish the upper 

boundary of reasonable royalty rates for 

an SDARS service. SDARS–I, 73 FR at 

4093. The use of that benchmark, in Mr. 

Bender’s view, demonstrates an 

intention of the Judges to use total 

subscription revenue as the base against 

which the royalty rates should apply. 

Bender WDT at 6, SX Trial Ex. 75. 

Applying this assumption to the 

revenues reported by Sirius XM from 

2007 through the third quarter of –2011, 

Mr. Bender concludes that Sirius XM 

has paid roughly 16%–23% less in total 

royalty fees than intended. Bender WDT 

at 6–7, SX Trial Ex. 75. 

SoundExchange targets for 

elimination several exclusions from 

Gross Revenues permitted under the 

current regulations. The first is 

paragraph (3)(vi)(B) of the current 

definition, which allows Sirius XM to 

deduct revenues received for ‘‘channels, 

programming products and/or services 

offered for a separate charge where such 

channels use only incidental 

performances of sound recordings.’’ 37 

CFR 382.11. This exclusion does not 

make sense for the new licensing 

period, according to SoundExchange, 

because the rates proposed by Dr. 

Ordover on behalf of SoundExchange 

and Dr. Noll on behalf of Sirius XM 

reflect that roughly half of the value of 

SiriusXM’s SDARS service is derived 

from its music programming and 

roughly half from its non-music 

programming. The exclusion for nonmusic programming is, therefore, built 

into the rates and should not be double 

counted in revenue. SX PFF at 383 

(¶ 838). Further, SoundExchange 

charges that exclusion from revenue of 

non-music channels encourages 

manipulation to reduce the royalty base 

in unprincipled ways. For example, 

Sirius XM could disaggregate its 

bundled subscription price of $14.49 

per month into a music package valued 

at $3.00 and a non-music package 

valued at $11.49. Sirius XM would not 

recognize any additional revenues from 

the separate packages, but could realize 

substantial reductions in royalty 

obligation. SX PFF at 387 (¶ 854). 

SoundExchange urges the Judges to 

prevent such arbitrary actions from 

occurring. 

SoundExchange also submits that 

paragraph (3)(vi)(D) of the current 

definition should be eliminated. That 

paragraph allows for deduction of 

revenues received from channels and 

programming that are licensed outside 

the Sections 112 and 114 licenses. 37 

CFR 382.11. Dr. Lys testified that Sirius 

XM excludes roughly between 10% and 

15% of its subscription revenue from 

the royalty base for performances of pre1972 recordings to its subscribers, 

thereby reducing its royalty obligation. 

Lys WRT at 54 (¶ 119), SX Trial Ex. 240. 

Yet, Sirius XM has not disclosed the 

process it uses to identify pre-1972 

recordings, or how it calculates the 

deduction it takes. 

SoundExchange’s proposed Gross 

Revenues definition also eliminates five 

other exclusions permissible under the 

current regulations. First, under its 

proposed definition, revenues received 

from Sirius XM’s webcasting service, 

which are currently linked to the 

SDARS satellite radio subscription, 

would come into the SDARS revenue 

base. Second, data services, such as 

Sirius XM’s weather and traffic services 

which can be purchased on a standalone basis but are more commonly 

offered to SDARS subscribers at a 

discount, would be included in the 

revenue base. Third, revenue 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23079 

58Curiously, SoundExchange does not argue for 

expansion of the Gross Revenues definition for PSS, 

a definition which has existed since the first royalty 

term for the PSS digital performance license. If 

SoundExchange’s broadened revenue definition for 

SDARS were acceptable, it would result in the two 

types of services licensed under Section 114(f)(1) 

calculating their royalties against radically different 

revenue bases. 

59 In SDARS–I, the Judges expressly recognized an 

exclusion from Gross Revenues for so-called nonmusic services, characterized as ‘‘channels, 

programming, products and/or other services 

offered for a separate charge where such channels 

use only incidental performances of sound 

recordings.’’ SDARS–I, 73 FR 4102 (citing 37 CFR 

382.11, definition of Gross Revenues). The Judges 

did this because the exclusion ‘‘unambiguously 

relat[ed] the fee to the value of the sound recording 

performance rights at issue * * *.’’ Id. at 4088. 

SoundExchange argues that if the exclusion is 

allowed to continue, it will amount to a double 

deduction from Sirius XM’s royalty obligation 

because Dr. Ordover’s marketplace benchmarks 

exclude the value of non-music services, and Dr. 

Noll adjusted his proferred benchmarks to account 

for the fact that roughly half of Sirius XM’s service 

is non-music. SX PFF ¶¶ 842–846. I agree with 

Sirius XM’s counter argument that Dr. Ordover’s 

modeling allocated revenues for both the music and 

non-music programming for Sirius XM’s standard 

‘‘Select’’ package, ‘‘but that allocation in no way 

relates to the separately priced non-music packages 

offered by Sirius XM that are the subject of the 

exemption.’’ Sirius XM RFF ¶ 167. The exemption, 

however, should be available only to the extent that 

the channels, programming, products and/or other 

services are offered for a separate charge. 

attributable to equipment sales or leases 

used to receive or play the SDARS 

service, would be included. Fourth, the 

current exclusions for credit card fees 

and bad debt expense would be 

eliminated. And, fifth, fees collected by 

Sirius XM for various activities related 

to customer account administration, 

such as activation fees, invoice fees, 

swap fees, and in certain cases early 

termination fees, would be included in 

the revenue base. According to Sirius 

XM, the elimination of these deductions 

would, in total and based upon 2012 

estimates, expand its annual revenue 

base, against which royalties are 

calculated, by over $300 million. Frear 

Revised WRT at ¶ 16, SX Reb. Trial Ex. 

1. 

3. Analysis and Conclusions 

In SDARS–I, the parties were at 

loggerheads over the definition of 

revenue, with SoundExchange favoring 

an expansive reading to include ‘‘all 

revenue paid or payable to an SDARS 

service that arise from the operation of 

an SDARS service,’’ SoundExchange 

Third Amended Rate Proposal (Aug. 6, 

2007) at section 38_.2(g), and the 

SDARS arguing for adoption of the 

existing Gross Revenues definition for 

PSS. XM Rate Proposal (Jan. 17, 2007) 

at section 26_.2(d); Sirius Rate Proposal 

(Jan. 17, 2007) at section 26_.2(d). With 

one exception, the Judges adopted the 

SDARS proposal. See SDARS–I, 73 FR 

4080, 4087 (Jan. 24, 2008). 

SoundExchange’s new proposal is again 

a request for an expansive reading of 

revenue. Its effort to respond to the 

Judges’ criticism of its SDARS–I 

proposal as possessing ‘‘scant 

evidentiary support,’’ is an attempt to 

demonstrate how Sirius XM has underreported revenue in the current 

licensing period by applying a slanted 

interpretation of the SDARS–I decision. 

Alternatively, it is an attempt to 

demonstrate how Sirius XM might 

manipulate its revenue base to lower its 

royalty obligation. With the exception of 

revenue exclusions for privately 

licensed and pre-1972 sound recordings 

discussed, infra, both of 

SoundExchange’s arguments lack 

merit.58

Mr. Bender’s argument that Sirius XM 

has paid roughly 16%–23% less in 

royalties in the current license period 

than was intended by the Judges in 

SDARS–I is dependent upon the 

assumption that there is a direct link 

between the revenue definition and the 

adjusted interactive subscription service 

benchmark presented by 

SoundExchange’s expert economist, Dr. 

Janusz Ordover. His reasoning is that 

because the Ordover benchmark was 

fashioned from interactive service 

license agreements that generally 

provided for inclusion of mostly all of 

subscriber revenue, it must be the case 

that the Judges intended the SDARS–I 

rates to apply to total subscription 

revenues. Bender WDT at 6–7, SX Trial 

Ex. 75. This presumed linkage between 

the benchmark and the revenue 

definition is not supported by the 

SDARS–I decision. The Judges never 

expressed an intention to adopt the 

revenue definitions contained in the 

subscription service license agreements 

used by Dr. Ordover; to the contrary, the 

Gross Revenues definition adopted in 

SDARS–I was quite different from those 

contained in the license agreements on 

the whole. Rather, in defining revenue, 

the Judges plainly stated that it was 

their intention to unambiguously relate 

the fee charged for a service provided by 

an SDARS to the value of the sound 

recording performance rights covered by 

the statutory licenses. SDARS–I, 73 FR 

at 4087. This is especially important 

where, as here, a proxy for use of sound 

recordings must be adopted because 

technological impediments do not 

permit implementation of a perperformance fee. The license agreements 

used in the Ordover benchmark do not 

provide for this connection between 

revenue and value under the statutory 

licenses, which is not surprising given 

that the interactive service license 

agreements conveyed rights beyond 

those granted by the Section 114 

license. In sum, Mr. Bender’s perceived 

linkage between the revenue definition 

and the Ordover benchmark favoring 

inclusion of total subscriber revenues is 

simply not there. 

In the alternative, SoundExchange 

argues that an expansive revenue base is 

easier to administer and reduces the 

chances for manipulation. Dr. Lys 

testified that, from an accounting 

perspective, it is preferable to base 

contracts on a financial definition that 

is clear-cut to administer and easy to 

audit, and that a revenue definition that 

is all-inclusive satisfies this preference. 

Lys WRT at 54 (¶ 117), SX Trial Ex. 240. 

While this may be true, SDARS–I 

included only those revenues related to 

the value of the sound recording 

performance rights at issue in the 

proceeding. SDARS–I, 73 FR at 4087. I 

am satisfied that the exclusions 

permitted in the current definition of 

Gross Revenues remain proper. 

However, if evidence were presented to 

conclusively demonstrate that one or 

more of the exclusions produces or 

results in a manipulation of fees for the 

sole purpose of reducing or avoiding 

Sirius XM’s statutory royalty obligation, 

then an amendment or elimination of 

the exclusion might be appropriate. 

SoundExchange has failed to meet this 

burden and has only offered speculation 

as to how Sirius XM might engage in 

revenue allocation to reduce its royalty 

obligation. With the exception of the 

exclusions for directly licensed and 

noncompensable sound recordings 

discussed infra, SoundExchange has 

failed to present persuasive evidence 

that any of the remaining exclusions it 

has targeted for elimination (fees 

received for non-music services,59

webcasting, data services, equipment 

sales, credit card fees and bad debt 

expenses, and customer account fees) 

have, in fact, been abused or otherwise 

manipulated for the sole purpose of 

improperly reducing Sirius XM’s 

statutory royalty obligations. 

4. Deductions for Directly Licensed and 

Pre-1972 Recordings 

Separate from the issue of exclusions 

from the Gross Revenues definition 

addressed above, I consider the impact 

to the royalty calculus of the 

performance by Sirius XM of sound 

recordings that it has directly licensed 

from record labels (and, therefore, does 

not rely upon the licenses offered by 

Sections 112 and 114), and the 

performance of sound recordings not 

compensable under the Copyright Act 

(i.e. pre-1972 recordings). 

mstockstill on DSK4VPTVN1PROD with RULES3

23080 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

60SoundExchange conditions the availability of 

its approach on the presumption that the music 

channels on the Internet service remain 

representative of the music channels offered on the 

SDARS service. 

61This is the same language that Sirius XM 

proposes also be applicable to directly licensed 

sound recordings. 

a. Directly Licensed Recordings 

Both the Section 112 and Section 114 

licenses recognize and permit the 

licensing of sound recordings through 

private negotiation. 17 U.S.C. 112(e)(5), 

114(f)(3). The parties concede, as they 

must, that directly licensed recordings 

are separate from those covered by the 

statutory licenses. At the outset, the 

parties did not address the treatment of 

such recordings in the context of this 

proceeding, presumably because they 

comprised only a small percentage of 

the total recordings performed by Sirius 

XM in a given period. However, due to 

the increasing instances of directly 

licensed recordings as a result of Sirius 

XM’s Direct Licensing Initiative, 

discussed infra, proposals were 

submitted and amended up until the 

closing of the record. Sirius XM 

contends that a deduction from Gross 

Revenues is necessary for directly 

licensed recordings; otherwise, a double 

payment would occur for performances 

of these works. Sirius XM PFF ¶ 425; 

Proposed Rates and Terms of Sirius XM 

Radio, Inc. at 3 (Sept. 26, 2012). 

SoundExchange acknowledges that 

directly licensed recordings must be 

accounted for, but resists a deduction 

from Gross Revenues. Instead, it 

proposes that the payable statutory 

royalty amount be determined by 

reducing the product of the royalty rate 

times Gross Revenues by a percentage 

approximating the value of the directly 

licensed usage. Second Revised 

Proposed Rates and Terms, at 4 (Sept. 

26, 2012). To determine the share of 

performances attributable to direct 

licenses, SoundExchange recommends 

using data from Sirius XM’s Internet 

webcasting service for music. The 

following calculation would then be 

made: 

• For each month, identify the Internet 

webcast channels offered by the Licensee that 

directly correspond to music channels 

offered on its SDARS that are capable of 

being received on all models of Sirius radio, 

all models of XM radio, or both (the 

‘‘Reference Channels’’).60

• For each month, divide the Internet 

performances of directly licensed recordings 

on the Reference Channels by the total 

number of Internet performances of all 

recordings on the Reference Channels to 

determine the Direct Licensing Share. 

Id. at 4–5. SoundExchange requests that, 

if its approach is adopted, Sirius XM be 

required to notify SoundExchange 

monthly of each copyright owner from 

which Sirius XM claims to have a direct 

license and each sound recording Sirius 

XM claims to be excludable. 

SoundExchange would then be 

permitted to disclose this information to 

confirm whether the direct license 

exists and the claimed sound recordings 

are properly excludable. 

Directly licensed recordings should 

not be a part of the calculus in 

determining the monthly statutory 

royalty obligation. To do otherwise 

would effectively result in a double 

payment for the directly licensed 

recordings and would discourage, if not 

altogether eliminate, the incentive to 

enter into such private licenses, 

contrary to Section 114 which 

recognizes, if not encourages, private 

licenses. 17 U.S.C. 114(f)(1)(B). I am not 

persuaded, however, by Sirius XM’s 

position that the exclusion of directly 

licensed recordings should be from 

Gross Revenues, as opposed to a 

deduction from the total royalty 

obligation. As Mr. Bender correctly 

points out, there is no revenue 

recognition associated with directly 

licensed recordings; it is a cost to Sirius 

XM. Bender WRT at 3, SX Trial Ex. 239. 

Sirius XM has not presented a revenue 

allocation between directly licensed and 

statutory licensed recordings that it 

performs on its SDARS service; it has 

presented a usage deduction that it 

seeks to apply to its revenue base. 

Excluding usage of sound recordings 

from Gross Revenues would not 

comport with the Judges’ approach in 

SDARS–I of unambiguously relating fees 

received by Sirius XM to the value of 

the sound recording performance rights 

at issue in this proceeding. 

I am persuaded that the proposed 

methodology of SoundExchange to 

calculate the royalty deduction for 

directly licensed recordings (i.e., the 

‘‘Direct License Share’’) is the superior 

approach to allowing Sirius XM to 

determine the percentage reduction 

based upon the number of plays of 

directly licensed recordings to total 

plays. Despite my request, Sirius XM 

and its contractor, Music Reports, Inc., 

were incapable of providing accurate 

data as to the identity and volume of 

directly licensed recordings on the 

SDARS service. See, SX PFF at 399–400. 

Reasonable accuracy and transparency 

are required for calculation of the Direct 

License Share, and SoundExchange has 

demonstrated that its proposed use of 

the Sirius XM webcasting service better 

satisfies these requirements. Use of the 

webcasting service also better ties the 

value of the sound recordings used, by 

measuring the listenership for each 

performance, than Sirius XM’s proposal 

for measuring only individual plays. 

b. Pre-1972 Recordings 

The performance right granted by the 

copyright laws for sound recordings 

applies only to those recordings created 

on or after February 15, 1972. Sound 

Recording Amendment, Public Law 92– 

140, 85 Stat. 391 (1971). Sirius XM 

makes performances of pre-1972 

recordings on its SDARS service and, in 

the present license period, excludes a 

percentage of revenues from its Gross 

Revenues calculation for such use. The 

current Gross Revenues definition does 

not expressly recognize such an 

exclusion, which is not surprising given 

that there is no revenue recognition for 

the performance of pre-1972 works. In 

taking the exclusion, Sirius XM 

apparently relies upon paragraph 

(3)(vi)(D) of the Gross Revenues 

definition which permits exclusion of 

revenue for programming exempt from 

any license requirement. Dr. Lys 

testified that the deduction is between 

10% and 15% of subscription revenue, 

a figure that was not disputed by Sirius 

XM. Lys WRT at 54, SX Trial Ex. 240. 

Sirius XM requests that the Judges 

amend paragraph (3)(vi)(D) to provide 

that its ‘‘monthly royalty fee shall be 

calculated by reducing the payment 

otherwise due by the percentage of 

Licensee’s total transmission of sound 

recordings during the month that are 

exempt from any license requirement or 

separately licensed.’’ Proposed Rates 

and Terms of Sirius XM Radio Inc. at 3 

(Sept. 26, 2012).61

As with directly licensed works, pre1972 recordings are not licensed under 

the statutory royalty regime and should 

not factor into determining the statutory 

royalty obligation. But, for the same 

reasons described above, revenue 

exclusion is not the proper means for 

addressing pre-1972 recordings. Rather, 

the proper approach is deduction from 

the total royalty obligation to account 

for performances of pre-1972 recordings. 

The question then remains as to how the 

correct deduction should be calculated. 

Sirius XM did not offer any testimony 

as to how it calculated its current 

deduction, or how it identified what 

recordings performed were pre-1972, 

other than the obtuse assertion of Mr. 

Frear that the lawyers talked to the 

finance team to assure a proper 

deduction. 8/13/12 Tr. 3125:3–3126:3 

(Frear). To be allowable, a deduction for 

pre-1972 recordings must be relatively 

precise and the methodology 

transparent. The same methodology 

applied to determining the Direct 

License Share—utilizing the Sirius XM 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23081 

62He also cites a 2008 survey by OTX, a 2012 

survey by Experian Simmons, a 2004 Arbitron 

survey, a 2011 Ipsos OTX MediaCT survey, and a 

2006 Sony BMG MusicLab survey. 

webcasting—is appropriate to identify 

pre-1972 recordings. 

D. The Section 114 Royalty Rates for 

PSS 

Chapter 8 and Section 114(f)(1) of the 

Copyright Act require the Judges to 

determine reasonable rates and terms of 

royalty payments for the digital 

performance of sound recordings. The 

rates the Judges establish under Section 

114(f)(1) must be calculated to achieve 

the objectives set forth in Section 

801(b)(1)(A) through (D) of the Act. 

Moreover, in establishing rates and 

terms the Judges may consider 

voluntary license agreements described 

in Section 114(f)(1)(B). 

As the Judges have done in prior rate 

proceedings where the determination 

standard is reasonable rates calculated 

to achieve the Section 801(b)(1) factors, 

consideration of marketplace 

benchmarks is a useful starting point. 

SDARS–I, 73 FR 4080, 4088 (Jan. 24, 

2008); Phonorecords I, 74 FR 4510, 4517 

(Jan. 26, 2009). As discussed below, the 

parties disagree about what constitutes 

the most appropriate benchmark to 

guide the Judges in determining a 

reasonable rate. Unfortunately, there are 

no voluntary license agreements 

negotiated under Section 114(f)(1)(B) for 

the Judges to consider, which is not 

surprising considering that Music 

Choice is the primary PSS service that 

continues to operate under the statutory 

license. Moreover, the benchmarks 

offered by the parties are not for similar 

products drawn from a marketplace in 

which buyers and sellers are similarly 

situated. I describe and discuss them 

below. 

1. PSS Proposed Benchmarks 

a. Proposed Musical Works Benchmark 

As previously discussed, Music 

Choice argues that the annual royalties 

it pays to the three performing rights 

societies (ASCAP, BMI, and SESAC) for 

the right to perform musical works to 

subscribers of its residential audio 

service is, by virtue of the Librarian’s 

determination in PSS–I, a precedential 

benchmark that establishes the upper 

boundary of reasonable rates in this 

proceeding. Although this contention 

has been rejected, supra, Music Choice 

offers the testimony of Mr. Del Beccaro 

and Dr. Crawford as corroborative of its 

position that the market for licensing 

the performance right in musical works 

is the most appropriate benchmark for 

establishing rates in this proceeding. 

Music Choice pays 2.5% of revenue 

each to ASCAP and BMI and pays an 

annual flat fee to SESAC that amounts 

to approximately [REDACTED] of net 

revenue. Del Beccaro Corrected WDT at 

21–22, MC 17, MC 18 and MC 19, PSS 

Trial Ex. 1. The sum of those licenses 

amounts to [REDACTED], which Music 

Choice submits should represent the 

upper bound of a reasonable royalty 

rate. Two pieces of evidence, in Music 

Choice’s view, corroborate the use of 

musical works licensing as a 

benchmark. First, Music Choice 

observes an equivalence between the 

fees for the performance of sound 

recordings and musical works in Canada 

and Europe. Music Choice cites four 

decisions of the Canadian Copyright 

Board, involving licensing fees for 

commercial radio, cable television, 

satellite music services and radio 

services of the Canadian Broadcasting 

Corporation, wherein the Board found 

that royalty rates for sound recordings 

and musical compositions have 

equivalent value. Del Beccaro Corrected 

WDT at MC 6 at 30–33 (commercial 

radio), MC 7 at 14 (cable television), MC 

8 at 50, 58 (satellite music services), MC 

9 at 4, 6, 15, 17, 30 (CBC radio services), 

PSS Trial Ex. 1. SoundExchange’s 

expert economist, Dr. George Ford, who 

recently submitted testimony before the 

Canadian Copyright Board, 

acknowledges that in Canada the 

musical composition and sound 

recording performance royalties are 

equal. 8/21/12 Tr. 4304:5–22 (Ford). In 

the United Kingdom, the sound 

recording performance royalty rates for 

commercial broadcasting services are 

less than those for the musical 

composition performance rights. Del 

Beccaro Corrected WDT at MC 11, PSS 

Trial Ex. 1. If Music Choice’s service 

were transmitted through cable in the 

U.K., Music Choice would pay 5.25% of 

85% of gross revenues for the musical 

works performance right, but would pay 

only 5% of 85% of gross revenues for 

the sound recording performance right. 

Id. 

The second piece of evidence to 

corroborate use of the musical works 

rate as a benchmark is an economic 

model called the Asymmetric Nash 

Bargaining Framework (referred to as 

the ‘‘Nash Framework’’) offered by Dr. 

Crawford. Acknowledging that a perfect 

benchmark does not exist to determine 

the PSS sound recording performance 

rate, Dr. Crawford uses the Nash 

Framework to fashion solutions to 

bargaining problems between bilateral 

monopolists, in this case record labels 

on the one hand and PSS providers on 

the other. Crawford Corrected WDT at 

12, PSS Trial Ex. 4. As a noncooperative bargaining model, the Nash 

Framework is designed to yield 

predictions about how outcomes are 

determined when firms negotiate; that 

is, how two firms would split the 

surplus of their interaction (i.e., 

revenues over costs) in a hypothetical 

negotiation. Id. at 16. Three factors (the 

Nash factors) are analyzed to determine 

the split: (1) the combined agreement 

surplus; (2) each firm’s threat point; and 

(3) each firm’s bargaining power. Id. 

According to Dr. Crawford, the Nash 

factors determine sound recording 

performance royalties in the following 

way: ‘‘The royalty received by each firm 

in a bargain equals its threat point plus 

its bargaining power times the 

incremental surplus.’’ Id. at 17. In other 

words, the combined agreement surplus 

and threat points determine the ‘‘size of 

the pie,’’ while the bargaining power 

determines the ‘‘split of the pie.’’ 

Dr. Crawford’s stated goal in applying 

the Nash Framework is to first establish 

the Nash factors for the hypothetical 

market (the sale of rights between one 

record company and one PSS provider) 

and compare them to the Nash factors 

in the actual musical works market (the 

sale of rights between the three 

performing rights societies and one PSS 

provider). Id. at 18. In the hypothetical 

market, Dr. Crawford determined that 

the threat point for the PSS provider is 

zero because in the absence of an 

agreement, it cannot offer music and 

therefore cannot earn a surplus. Id. at 

19. He determines, however, that the 

threat point for a record company is 

negative because the failure to reach an 

agreement has additional implications 

for the record company in other, nonPSS markets. Specifically, the failure to 

reach an agreement with the PSS 

provider would have substantial adverse 

impacts on the record company, such as 

on sales of compact disks, because there 

is a significant promotional benefit to 

the record company from the PSS 

provider. Id. To support this contention, 

Music Choice offers the testimony of 

Damon Williams, who testified that 

record company executives consider 

Music Choice promotional and provide 

artists with greater exposure. Williams 

WDT at 4–11, MC 28, 29, 32, PSS Trial 

Ex. 3. Mr. Williams offers examples of 

how Music Choice conducts custom 

promotions for artists, id. at 13–20, and 

points to a 2005 Arbitron survey in 

particular that he argues confirms that 

Music Choice’s residential audio service 

sells records. Id. at 13.62 And Mr. 

Williams argues that Music Choice has 

become more promotional since the 

PSS–I proceeding by virtue of the fact 

mstockstill on DSK4VPTVN1PROD with RULES3

23082 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

63 Dr. Crawford also concludes that the 

marketplace for musical works royalties might be 

greater than the sound recording marketplace 

because the performing rights society loses less than 

a record company in the absence of an agreement. 

Crawford Corrected WDT at 18, 29, PSS Trial Ex. 

4. 

64Under this model, a firm’s cost of capital is 

based on the expected return to induce investment. 

Crawford Corrected WDT at ¶ 167, PSS Trial Ex. 4. 

that it currently reaches more customers 

with more channels. Id. at 24. 

With respect to the last Nash factor, 

bargaining power, Dr. Crawford assumes 

it to be neutral, based upon Music 

Choice’s existing technology platform 

and contract, which cannot be easily 

replaced or replicated, and his 

observations of Music Choice’s 

bargaining efforts for sound recording 

performance rights with respect to 

music videos. Crawford Corrected WDT 

at 15–16, PSS Trial Ex. 4. 

Applying the Nash factors to the 

existing market for the PSS musical 

works performance right, Dr. Crawford 

determines that the threat point for a 

PSS provider is again zero, and is again 

negative for the performing rights 

society (ASCAP, BMI or SESAC) 

because the loss of promotional value 

from the PSS provider produces loss of 

profits from other markets. Id. at 28. Dr. 

Crawford again assumes equal 

bargaining power between the PSS 

provider and the performing rights 

society, based largely upon his 

observations that the two possess equal 

patience in their negotiations. Id. at 29. 

This results in a 50/50 split of the 

surplus, the same conclusion he reached 

with respect to the hypothetical market. 

Because of the similarities between the 

Nash factors in the hypothetical market 

and the market for musical works, Dr. 

Crawford concludes that the musical 

works market makes for a good 

benchmark for the hypothetical sound 

recording performance right market at 

issue in this proceeding. Id. at 30.63

b. Proposed Alternative Surplus 

Splitting Analysis 

As an alternative, Dr. Crawford 

provided a surplus splitting analysis to 

corroborate the reasonableness of Music 

Choice’s rate proposal by using financial 

results to construct an estimate of the 

profits that would be shared in a royalty 

payment. Crawford Corrected WDT at 

43, PSS Trial Ex. 4. Dr. Crawford 

adjusted Music Choice’s 2006–2010 

operating profit to remove the actual 

royalty paid by Music Choice for sound 

recording performance rights, and then 

applied a capital asset pricing model 64

to derive an expected rate of return on 

assets of 8.33%. Crawford Corrected 

WDT at Appendix B.4, PSS Trial Ex. 4. 

He then multiplied the 8.33% rate by 

Music Choice’s average operating assets 

to determine cost of capital, and then 

subtracted cost of capital from the 

royalty-adjusted operating profits to 

derive the residual profits for each year. 

Id. at 47. This showed that Music 

Choice’s cumulative returns in excess of 

its cost of capital, but before payment of 

sound recording royalties, amounts to 

3.05% of Music Choice’s 2006–2010 

royalties. Id. A 50/50 split of this 

surplus results in a royalty payment of 

1.52% of residential audio revenues. Id. 

at 48. He then applied a range of 20% 

to 80% of the expected surplus to 

determine a range of reasonable 

royalties from 0.61% to 2.43%, not to 

exceed the 3.05% expected surplus. Id. 

2. SoundExchange Proposed 

Benchmarks 

SoundExchange does not offer a 

single market benchmark to set the 

royalty rates to be paid by Music Choice 

for the sound recording performance 

right, and instead offers rates from over 

2,000 marketplace agreements, 

representing a variety of rights licensed, 

in an effort to frame a zone of reasonable 

rates. Dr. Ford observes that PSS like 

Music Choice have certain distinctive 

features that make it difficult to identify 

a suitable benchmark market. Ford 

Second Corrected WDT at 12, SX Trial 

Ex. 79. First, Music Choice does not sell 

its service directly to subscribers, but 

rather to cable television operators who 

then bundle the Music Choice 

programming with a package of video 

programming for ultimate sale to 

subscribers. Music Choice is, therefore, 

an intermediary between cable operators 

and their subscribers, unlike any of the 

digital music services the Judges have 

previously dealt with. Ford Second 

Corrected WDT at 12, SX Trial Ex. 79; 

6/18/12 Tr. 2810:20–2811:3 (Ford). 

Second, Music Choice’s service is 

almost always bundled with a hundred 

or more channels of video and is almost 

never sold on a stand-alone basis. Ford 

Second Corrected WDT at 13, SX Trial 

Ex. 79. This makes it difficult to 

determine the specific consumer value 

for Music Choice’s programming alone. 

Id. 

Given these difficulties, Dr. Ford uses 

an all-inclusive approach of examining 

royalty rates for different digital music 

markets: portable and non-portable 

interactive subscription webcasting, 

cellular ringtones/ringbacks, and digital 

downloads. Id. at 15–16, Table 1. Most 

of the over 2,000 licensing agreements 

he examined across these markets 

calculate royalties based on a ‘‘greater 

of’’ methodology that includes a perplay royalty fee, a per-subscriber fee, 

and a revenue-based fee. For 

convenience, Dr. Ford analyzed only the 

revenue-based fees, judging his results 

to be conservative because the other two 

payment metrics might produce a larger 

total royalty fee than the revenue-based 

calculation. 6/18/12 Tr. 2861:3–13 

(Ford). His results reveal a percentage of 

revenue rate of 70% for digital 

downloads, 43% to 50% for ringtones/ 

ringbacks, and 50% to 60% for portable 

and non-portable interactive 

subscription webcasting, respectively. 

Ford Second Corrected WDT at 15–16, 

Table 1, SX Trial Ex. 79. According to 

Dr. Ford, the rate proposal of 

SoundExchange for PSS comports well 

with the range established by these 

agreements, in that it rises above the 

lowest average rate (43%) only in the 

last year of the licensing term, and 

therefore can ‘‘be presumed to be a 

reasonable proxy for a market outcome.’’ 

Ford Second Corrected WDT at 16, SX 

Trial Ex. 79; 6/18/12 Tr. 2831:8–15 

(Ford). 

3. Analysis and Conclusions Regarding 

the Proposed Benchmarks 

Based upon the evidence put forward 

in this proceeding, none of the proposed 

benchmarks provide a satisfactory 

means for determining the sound 

recording performance royalty to be 

paid by Music Choice. 

Turning first to Music Choice’s 

arguments in favor of the musical works 

benchmark, I find them severely 

wanting. The fees paid to the three 

performing rights societies for the 

performance right to musical works 

have been offered in several other 

proceedings before the Judges and have 

been rejected consistently. Webcasting 

II, 72 FR 24084 (May 1, 2007); SDARS– 

I, 73 FR 4080 (Jan. 24, 2008); see, also 

Webcasting I, 67 FR 45240 (July 8, 

2002)(Librarian of Congress’s 

determination). The primary reason for 

the benchmark’s rejection is the lack of 

comparability to the target market for 

sound recording performance rights. Dr. 

Crawford, who advocates the 

appropriateness of the musical works 

market, acknowledges that a benchmark 

market should involve the same buyers 

and sellers for the same rights. Crawford 

Corrected WDT at 24, PSS Trial Ex. 4. 

However, the musical works market 

involves different sellers (performing 

rights societies versus record 

companies) selling different rights. See 

SDARS–I, 73 FR at 4089. The fact that 

a PSS needs performance rights to 

musical works and sound recordings to 

operate its service does not make the 

rights equivalent, nor does it say 

anything about their values 

individually. Further, as in previous 

proceedings, the evidence establishes 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23083 

65Music Choice’s criticisms of the Harrison 

chart—that it omits synchronization and master use 

licenses, encompasses wholesale payments rather 

than specific rates, and involves some agreements 

that convey additional rights—do not detract from 

the conclusion that overall the royalty fees paid for 

sound recordings are typically significantly higher 

than those paid for musical works. 

that the market commands higher 

royalty fees for the licensing of sound 

recordings than musical works. Aaron 

Harrison presented a chart 

demonstrating the different average 

royalty fees that Universal Music Group, 

one of the major record labels, receives 

for digital downloads, ringtones, ondemand music videos and portable 

subscription services, all of which are 

considerably higher than the fees 

received by the performing rights 

societies.65 Harrison Corrected WRT at 

13–14, PSS Trial Ex. 32. Dr. Ford made 

similar observations. Ford Amended/ 

Corrected WRT at 7, SX Trial Ex. 244. 

I am once again led to the conclusion 

that use of the musical works market as 

a benchmark is fraught with flaws and 

only indicates that a reasonable rate for 

sound recordings cannot be as low as 

the musical works rate. See, SDARS–I, 

73 FR at 4090. 

Music Choice’s efforts to corroborate 

the sufficiency of the musical works 

benchmark with a comparison to foreign 

rates also are unavailing. The Judges 

have considered before the significance 

of foreign countries’ treatment of the 

licensing of exclusive rights granted by 

copyright. In the proceeding to set rates 

and terms for the reproduction of 

musical compositions under the Section 

115 license of the Copyright Act, certain 

licensees offered evidence of license 

rates in the U.K., Canada and Japan. See 

Phonorecords I, 74 FR 4510, 4521 (Jan. 

26, 2009). In rejecting the foreign rate 

benchmarks, the Judges stated that 

attempts at comparison of U.S. rights 

with foreign rights ‘‘underline the 

greater concern that comparability is a 

much more complex undertaking in an 

international setting than in a domestic 

one. There are a myriad of potential 

structural and regulatory differences 

whose impact has to be addressed in 

order to produce a meaningful 

comparison.’’ Id. at 4522. Neither Mr. 

Del Beccaro nor Dr. Crawford even 

attempt an analysis or discussion of the 

intricacies of Canadian and U.K. 

markets for performance rights for 

musical works and sound recordings, 

and Music Choice itself concedes that 

particular license rates in Canada and 

Europe ‘‘do not necessarily determine 

what the specific market rate in the 

United States should be for the sound 

recording right.’’ Music Choice PFF 

¶ 135. 

Likewise, I am not persuaded that Dr. 

Crawford’s application of the Nash 

Framework provides corroboration. The 

Nash Framework is a highly theoretical 

concept whose goal is to evaluate how 

the surplus from a transaction might be 

divided among participants. As Dr. Ford 

points out, a problem with applying the 

Nash Framework to a determination of 

a royalty rate is that a royalty does not 

split surplus, it splits revenues. Ford 

Amended/Corrected WRT at 8, SX Trial 

Ex. 244. An even split of surplus, as Dr. 

Crawford presumes from the model, 

does not imply an even split of 

revenues. Id. Further, Dr. Crawford’s 

efforts to apply the Nash Framework to 

royalties to be paid by Music Choice 

only contemplates a two-party 

transaction between record labels and 

Music Choice, even though Music 

Choice is the intermediary between 

cable operators that actually perform the 

sound recordings in the output market. 

The presence of an intermediary 

disrupts and complicates the Nash 

analysis because it introduces an 

additional bargain in the output market 

and requires that all three bargains be 

considered jointly. Id. at 15. Dr. 

Crawford did not take this complicating 

factor into consideration. 

I also have serious reservations 

concerning Dr. Crawford’s assumption 

that the Nash factor of bargaining power 

is assumed to be neutral. Mr. Del 

Beccaro testified that Music Choice has 

a number of competitors in the 

marketplace, meaning that record 

companies have other alternatives for 

licensing their works. Del Beccaro 

Corrected WDT at 36–37, PSS Trial Ex. 

1. This undermines Dr. Crawford’s 

determination of the Nash Factor threat 

point to the surplus received by record 

companies in the event no agreement is 

reached. If record companies have other 

options, then the assumed zero sum 

effect of the bargaining agreement under 

the Nash Framework is violated. 

Finally, Dr. Crawford places undue 

reliance on the perceived promotional 

value of Music Choice, which is central 

to his application of the Nash 

Framework. For his conclusion to be 

correct—that failure to reach a 

bargaining agreement will result in a 

substantial loss of record sales due to 

the absence of promotional value from 

Music Choice—he must demonstrate a 

causal relationship between Music 

Choice’s promotion of sound recordings 

and the sale of those recordings. His 

evidence on this point, however, is 

mostly anecdotal and weak. The surveys 

relied upon by Mr. Williams do not 

confirm a causal link between 

listenership to Music Choice and 

subsequent record sales; at best, the 

2005 Arbitron survey (already more 

than seven years old) demonstrates that 

there is some correlation between 

listenership and sales. There could be 

many reasons for the correlation, 

including the possibility that cable 

subscribers who listen to Music Choice 

are already inclined to purchase more 

music. For example, the 2010 Experian 

Simmons survey, cited by Mr. Williams, 

shows that Music Choice listeners are 

more likely than the average person to 

attend concerts, know what songs are in 

the top 10, read Rolling Stone magazine, 

and consume electronic and video 

goods at a higher rate. Williams WDT at 

MC 36, PSS Trial Ex. 3. Furthermore, 

none of the surveys cited by Dr. 

Crawford, including the antiquated 2006 

Sony BMG Music Lab survey, offer 

reliable evidence as to whether Music 

Choice’s residential audio service 

creates a net promotional or 

substitutional effect on the purchase of 

CDs or other music services. Without 

reliable data that quantifies the net 

effect of Music Choice, Dr. Crawford’s 

conclusion regarding Music Choice’s 

promotional effect is not sustainable. 

I am not persuaded that Dr. 

Crawford’s Nash Framework analysis 

confirms acceptance of the musical 

works benchmark for PSS, nor that 

royalty rates in the market for sound 

recordings is less than that for musical 

works. Likewise, I do not agree that Dr. 

Crawford’s alternative surplus splitting 

analysis is probative. The Judges have 

previously found theoretical surplus 

splitting models to be of limited value, 

and Dr. Crawford’s analysis is no 

different. See, Webcaster II, 72 FR 

24084, 24092–93 (May 1, 2007); 

SDARS–I, 73 FR at 4092. Although Dr. 

Crawford claims that his 20% to 80% 

range of a split of 3.05% of Music 

Choice’s 2006–2010 revenues reflects 

arm’s length negotiations between 

Music Choice and record companies, he 

provides no market evidence to support 

this contention. Crawford Corrected 

WDT at 49–50, PSS Trial Ex. 4. There 

are also methodological difficulties in 

the manner in which Dr. Crawford 

examined Music Choice’s historical 

financial data. Specifically, he included 

in his cost analysis those costs 

associated with Music Choice’s music 

video business in addition to the costs 

for the residential audio business, 

presumably because he was told by 

Music Choice personnel that it was not 

possible to allocate expenses between 

the video and audio components of the 

company’s business. 6/12/12 Tr. 

1859:21–1860:21 (Crawford). The net 

effect of including the music video 

business, which has substantial costs 

mstockstill on DSK4VPTVN1PROD with RULES3

23084 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

and not much revenue, is to drive down 

the surplus he proposes to be split 

between Music Choice and record 

companies. Even if I were persuaded in 

theory by Dr. Crawford’s surplus 

splitting analysis—and I am not—his 

failure to confine his cost and revenue 

analysis solely to the residential audio 

business, which is the subject of the 

statutory licenses in this proceeding, 

prohibits its usefulness. 

Turning to the music service 

benchmarks offered by SoundExchange 

and supported by Dr. Ford, one is 

confronted with severe theoretical and 

structural difficulties. Although the 

volume (over 2,000) of marketplace 

agreements examined by Dr. Ford for 

music products and services might 

suggest real usefulness in a benchmark 

analysis, the four markets examined— 

portable and non-portable subscription 

interactive webcasting, ringtones/ 

ringbacks, and digital downloads— 

involve the licensing of products and 

rights separate and apart from the right 

to publicly perform sound recordings in 

the context of this proceeding. Thus, the 

key characteristic of a good 

benchmark—comparability—is not 

present. SDARS–I, 73 FR at 4092. The 

buyers are different, there are different 

music products included (ringtones and 

ringbacks, digital downloads) and there 

are different rights licensed in the 

output market. Further, I do not accept 

Dr. Ford’s contention that, as a matter of 

economics, it is irrelevant that different 

legal rights are conveyed by the 

benchmark agreements he examined. 

6/18/12 Tr. 2819:5–10 (Ford). The 

agreements examined by Dr. Ford 

themselves suggest that the rights 

licensed, and the context in which they 

are licensed, make a great deal of 

importance in determining their value. 

I do agree with Dr. Ford’s 

observations that Music Choice has 

several distinct features, such as its 

intermediary role between cable systems 

and subscribers and the bundling of 

Music Choice’s services with multiple 

channels of video and other non-music 

programming, that significantly dim the 

possibility of market comparators. This 

is not to say that the value of the sound 

recording right in the PSS market is 

exceedingly low, as Music Choice 

would have it, nor exceedingly high, as 

SoundExchange would have it. 

SoundExchange’s rate proposal begins 

with a rate of 15% of Gross Revenues in 

the first year of the licensing term, 

which is endorsed by Dr. Ford as being 

within the range of reasonable rates for 

the PSS even though it is far lower than 

the average rates he determined in his 

benchmark analysis. For this reason, the 

15% rate represents nothing more than 

the uppermost bound of the range of 

reasonable royalty rates for the PSS. 

Based upon the above analysis, I am 

left with a consideration of the existing 

7.5% royalty rate which is the product 

of settlement negotiations that occurred 

in SDARS–I between Music Choice and 

SoundExchange, and is a rate for which 

neither party advocates. Although it is 

a rate that was negotiated in the shadow 

of the statutory licensing system and 

cannot properly be said to be a market 

benchmark, nothing in the record 

persuades me that 7.5% of Gross 

Revenues, as currently defined, is either 

too high, too low or otherwise 

inappropriate. Accord, Phonorecords I, 

74 FR at 4522. I now turn to the Section 

801(b) policy factors. 

4. The Section 801(b) Factors 

Section 801(b)(1) of the Copyright Act 

states, among other things, that the rates 

that the Judges establish under Section 

114(f)(1) shall be calculated to achieve 

the following objectives: (A) To 

maximize the availability of creative 

works to the public; (B) to afford the 

copyright owner a fair return for his or 

her creative work and the copyright user 

a fair income under existing conditions; 

(C) to reflect the relative roles of the 

copyright owner and the copyright user 

in the product being made available to 

the public with respect to relative 

creative contribution, technological 

contribution, capital investment, cost, 

risk, and contribution to the opening of 

markets for creative expression and 

media for their communication; and (D) 

to minimize any disruptive impact on 

the structure of the industries involved 

and on generally prevailing industry 

practice. 17 U.S.C. 801(b)(1). Based on 

the record evidence in this proceeding, 

the benchmark evidence submitted by 

Music Choice and SoundExchange has 

failed to provide the means for 

determining a reasonable rate for the 

PSS, other than to indicate the extreme 

ends of the range of rates. The testimony 

and argument of Music Choice 

demonstrates nothing more than to 

show that a reasonable rate cannot be as 

low as the rates paid by Music Choice 

to the three performing rights societies 

for the public performance of musical 

works. The benchmark testimony of 

SoundExchange is of even lesser value. 

The proposed rate of 15% for the PSS 

for the first year of the licensing period, 

deemed reasonable by Dr. Ford (at least 

in the beginning of the licensing 

period), stands as the absolute upper 

bound of the range of reasonable rates. 

At the middle of the range is the current 

7.5% rate and, based upon the record, 

I am are persuaded that it is neither too 

high, too low, or otherwise 

inappropriate, subject to consideration 

and necessary adjustment under the 

Section 801(b) factors discussed below. 

a. Maximize Availability of Creative 

Works 

Both SoundExchange and Music 

Choice presented arguments as to how 

their proposed benchmark rates satisfy 

this factor, which are not relevant given 

that the musical works benchmark and 

the Ford music service benchmarks only 

serve the purpose of framing the 

absolute lower and upper bounds of 

reasonable rates. Rather, it is the current 

7.5% rate to which the evidence 

presented under this factor must be 

applied. 

Music Choice touts that it is a music 

service that is available in over 54 

million homes, with 40 million 

customers using the service every 

month. 8/16/12 Tr. 3878:3 (Del 

Beccaro); Del Beccaro Corrected WDT at 

4, 26, PSS Trial Ex. 1; 6/11/12 Tr. 

1462:5–11, 1486:19–1487:2 (Del 

Beccaro). Channel offerings have 

increased through the years, curated by 

experts in a variety of music genres. Del 

Beccaro Corrected WDT at 3, 24, PSS 

Trial Ex. 1. Recent developments in 

technology permit Music Choice to 

display original on-screen content 

identifying useful information regarding 

the songs and artists being performed at 

any one time. Id. at 24; Williams WDT 

at 12, MC 23, PSS Trial Ex. 3; 6/11/12 

Tr. 1461:14–1462: 1, 1491:1–12 (Del 

Beccaro). According to Music Choice, 

these elements, along with the 

promotional efforts detailed above in 

the context of Dr. Crawford’s Nash 

Framework analysis, support a 

downward adjustment in the rates. In 

any event, an upward adjustment in the 

rates, argues Music Choice, would not 

affect the record companies’ bottom-line 

because PSS royalties are not a material 

revenue source for record companies. 

Music Choice PFF ¶¶ 409–417. 

SoundExchange submits that a market 

rate incorporates considerations under 

the first Section 801(b) factor, citing the 

Judges decision in SDARS–I, and that if 

PSS rates turn out to be too high and 

drive Music Choice from the market, 

presumably consumers will shift to 

alternative providers of digital music 

where higher royalty payments are more 

likely for record companies. Ford 

Second Corrected WDT at 19–20, SX 

Trial Ex. 79. 

The current PSS rate is not a market 

rate so that market forces cannot be 

presumed to determine the maximum 

amount of product availability 

consistent with the efficient use of 

resources. See SDARS–I, 73 FR 4094. 

However, the testimony demonstrates 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23085 

66Much was made at trial and in closing 

arguments regarding Dr. Crawford’s supposed use of 

audited financial data and Dr. Ford’s use of 

unaudited financial data in an effort to examine 

costs and revenues of the PSS service vis-a`-vis 

Music Choice’s other non-statutory offerings. I see 

no superiority to either data set, as both contain 

their own difficulties. 

67 It would be surprising, if not improbable, that 

Music Choice would be able to operate a PSS 

service for over 15 years with a statutory royalty 

between 6.5% and 7.5%, with the considerable 

losses that it claims, and nonetheless continue to 

operate, let alone intend to expand its current 

operation. 

that Music Choice has not, under the 

current rate, reduced its music offerings 

or contemplated exiting the business; in 

fact, it will be expanding its channel 

offerings in the near term. There is also 

no evidence that suggests that the 

output of music from record labels has 

been impacted negatively as a result of 

the current rate. There is no persuasive 

evidence that a higher PSS royalty rate 

will necessarily result in increased 

output of music by the record 

companies (major or independent), nor 

that a lower rate will necessarily further 

stimulate Music Choice’s current and 

planned offerings. In sum, the policy 

goal of maximizing creative works to the 

public is reasonably reflected in the 

current rate and, therefore, no 

adjustment is necessary. 

b. Afford Fair Return/Fair Income Under 

Existing Market Conditions 

Music Choice submits that the Judges 

need not worry about the impact of a 

low royalty rate on the fair return to 

record companies and artists for use of 

their works because royalties from the 

PSS market are so small as to be 

virtually inconsequential to companies 

whose principal business is the sale of 

CDs and digital downloads. Music 

Choice PFF ¶¶ 420–430. With respect to 

Music Choice’s ability to earn a fair 

income, however, Music Choice argues 

that it is not profitable under the current 

7.5% rate. Mr. Del Beccaro testified that 

its average revenue per customer for its 

residential audio business has been on 

the decline since the early 1990’s, down 

from $1.00 per customer/per month to 

[REDACTED] per customer/per month 

currently. Del Beccaro Corrected WDT 

at 40, PSS Trial Ex. 1. He further 

testified that after 15 years of paying a 

PSS statutory rate between 6.5% and 

7.5% Music Choice has not become 

profitable on a cumulative basis and is 

not projected to become so within the 

foreseeable future. Id. at 42. Cumulative 

loss at the end of 2011 is [REDACTED], 

projected to grow to [REDACTED] in 

2012 and continue to increase 

throughout the 2013–2017 license 

period. Id. at 33–34; Del Beccaro 

Corrected WRT at MC 69 at 1, MC 70 at 

1, PSS Trial Ex. 21. These losses lead 

Music Choice to conclude that it has not 

generated a reasonable return on capital 

under the existing rates, which it 

submits should be 15% in the music 

industry. Music Choice PFF ¶¶ 442–43. 

Music Choice’s claims of 

unprofitability under the existing PSS 

rate come from the oblique presentation 

of its financial data and a combining of 

revenues and expenses from other 

aspects of its business. The appropriate 

business to analyze for purposes of this 

proceeding is the residential audio 

service offered by Music Choice, the 

subject of the Section 114 license. Music 

Choice, however, reports costs and 

revenues for its residential audio 

business with those of its commercial 

business, which is not subject to the 

statutory license. This conflation of the 

data, which Music Choice acknowledges 

cannot be separated, see SX PFF at 221– 

222, distorts its views regarding losses. 

As a consolidated business, Music 

Choice has had significantly positive 

operating income during the past five 

years between 2007 and 2011 and has 

made profit distributions to its partners 

since 2009. Ford Amended/Corrected 

WRT at SX Ex. 362, p. 3, SX Trial Ex. 

244; SX Trial Ex. 64 at 3; SX Trial Ex. 

233 at 3. Dr. Crawford’s effort to extract 

costs and revenues from this data for the 

PSS service alone for use in his surplus 

analysis cannot be credited because of 

his lack of familiarity with the data’s 

source. 6/13/12 Tr. 1890:15–1891:10 

(Crawford).66 Music Choice has 

operated successfully and received a fair 

income under the existing statutory 

rate.67

With respect to fair return to the 

copyright owner, the examination is 

whether the existing statutory rate has 

produced a fair return with respect to 

the usage of sound recordings. During 

the period of the current rate and before, 

Music Choice provided 46 channels of 

music programming to the subscribers 

of its licensees. However, Music Choice 

is expanding the number of music 

channels dramatically in the coming 

licensing term, up to 300 channels by 

the first quarter of 2013. Del Beccaro 

Corrected WDT at 3–4, PSS Trial Ex. 1; 

8/16/12 Tr. 3878:3 (Del Beccaro). This 

will result in a substantial increase in 

the number of plays of music by Music 

Choice, even if the ultimate listenership 

intensity of its licensees’ subscribers 

cannot be measured. The expansion in 

usage will not be reflected in increased 

revenues to which the statutory royalty 

rate is to be applied, as Music Choice 

has declared itself to be a mature 

business with no expectation of 

increased future revenues for its 

business. As a result, copyright owners 

will not be compensated for the 

increased usage of their works, 

underscoring the Judges’ preference for 

a per-performance metric for royalty 

determinations—which is not available 

here—as opposed to a percentage-ofrevenue metric. Dramatically expanded 

usage without a corresponding 

expectation of increased compensation 

suggests an upward adjustment to the 

existing statutory rate. Measurement of 

the adjustment is not without difficulty 

because any downstream increases in 

listenership of subscribers as a result of 

additional music offerings by Music 

Choice cannot be readily determined 

nor predicted. It is possible that 

listenership overall may remain 

constant despite the availability of 300 

music channels as opposed to only 46. 

However, it is more reasonable to 

conclude that Music Choice would not 

make the expansion, and incur the 

additional expense of doing so, without 

reasonable expectation that subscribers 

will be more attracted to and will 

consume more of the music offerings of 

Music Choice. A 2% upward 

adjustment, phased-in during the course 

of the license period as described below, 

is sufficient to provide copyright owners 

with a fair return for the increased use 

of sound recordings by Music Choice. 

c. Relative Roles of Copyright Owners 

and Copyright Users 

This policy factor requires that the 

rates adopted by the Judges reflect the 

relative roles of the copyright owners 

and copyright users in the product made 

available with respect to relative 

creative contribution, technological 

contribution, capital investment, cost, 

risk, and contribution to the opening of 

markets for creative expression and 

media for their communication. For its 

part, Music Choice’s arguments that its 

creative and technological 

contributions, and capital investments, 

outweigh those of the record companies 

center on the same aspects of its 

business. First, Music Choice touts the 

graphic and informational 

improvements made to its on-screen 

channels, noting that what were once 

blank screens now display significant 

artist and music information. Costs for 

these improvements have exceeded 

[REDACTED]. Del Beccaro Corrected 

WDT at 31–32, PSS Trial Ex. 1. Second, 

Music Choice offers increases in 

programming, staff size and facilities, 

along with enhancements to product 

development and infrastructure. Costs 

for these improvements have exceeded 

[REDACTED]. Id. Regarding costs and 

risks, Music Choice points to its lack of 

profitability and the exit of other PSS 

mstockstill on DSK4VPTVN1PROD with RULES3

23086 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

68 I note that DMX’s exit from the PSS market in 

2000 offers an opportunity to examine how the 

departure of a PSS impacts consumer choices and 

their consumption of music, but no such analyses 

were presented in this proceeding. 

from the market as evidence of its 

continued risk and limited opportunity 

for profit. Music Choice PFF ¶¶ 512– 

520. Finally, with respect to opening 

new markets, Music Choice touts the 

PSS market itself for which it remains 

the standard-bearer in disseminating 

music to the public through cable 

television. Id. at ¶ 523. 

SoundExchange offers little more on 

the third Section 801(b) factor beyond 

Dr. Ford’s contention that he saw no 

evidence to support that Music Choice 

makes contributions to creativity or 

availability of music that are beyond 

those of the music services he included 

in his benchmarks, and therefore the 

third factor is accounted for in the 

market. Ford Second Corrected WDT at 

21, SX Trial Ex. 79; 6/18/12 Tr. 

2849:10–16 (Ford). 

In considering the third factor, the 

Judges’ task is not to determine who 

individually bears the greater risk, 

incurs the higher cost or makes a greater 

contribution in the PSS market, and 

then make individual up or down 

adjustments to the selected rate based 

upon some unspecified quantification of 

these differences. Rather, the 

consideration is whether these 

elements, taken as a whole, require 

adjustment to the existing rate of 7.5%. 

Upon careful weighing of the evidence, 

I determine that no adjustment is 

necessary. Music Choice’s investments 

in programming offerings, staff and 

facilities, and other related products and 

services are no doubt impressive, but 

they have been accomplished under the 

current rate and previous rates that are 

only slightly lower (the low being 

6.5%). As discussed above, Music 

Choice has already begun to expand its 

channel offerings by several multiples 

and has allocated greater financial 

resources to its residential audio 

business. All of these undertakings, plus 

the investments made and costs 

incurred to date have been made in the 

shadow of the existing rate, and have 

not been prevented as a result of that 

rate. Likewise, on the other side of the 

ledger, SoundExchange has not offered 

any persuasive evidence that the 

existing rate has prevented the music 

industry from making significant 

contributions to or investments in the 

PSS market. 

d. Minimize Disruptive Impact 

Of the four Section 801(b) factors, the 

parties devoted most of their attention 

to the last one: minimizing disruption 

on the structure of the industries and on 

generally prevailing industry practices. 

This is perhaps not surprising, given the 

role this factor played in SDARS–I in 

adjusting the benchmark rates utilized 

by the Judges to set the royalty fees. See 

SDARS–I, 73 FR at 4097–98. Music 

Choice presents a considerable volume 

of testimony and argument as to why 

the SoundExchange proposed rates 

would be disruptive, if not debilitating, 

to its business; and SoundExchange 

presents testimony and argument as to 

why Music Choice’s proposed rates 

would disrupt the music industry. 

These contentions, however, are 

inapposite as neither the 

SoundExchange nor the Music Choice 

benchmark analyses serve the purpose 

of determining a reasonable rate other 

than to mark the extreme ends of the 

boundary within which a reasonable 

rate can be located. Because I have 

identified as reasonable the rate for PSS 

currently in place, my analysis of the 

disruption factor is confined to that rate. 

SoundExchange argues that the 

current rate is disruptive to the music 

industry. Dr. Ford testified that ‘‘the 

current practice of applying an 

exceedingly low rate to deflated 

revenues is disruptive of industry 

structure, especially where there are 

identical services already paying a 

higher rate.’’ Ford Second Corrected 

WDT at 23, SX Trial Ex. 79. This results, 

according to Dr. Ford, in a tilting of the 

competitive field for music services in 

favor of Music Choice, thereby 

disrupting the natural evolution of the 

music delivery industry. Dr. Ford, 

however, appears to ignore his own 

earlier assertions that the PSS market 

has unique and distinctive features that 

distinguish it from other types of music 

services, thereby substantially reducing 

the likelihood that the PSS and other 

music services are substitutes for one 

another. Further, Dr. Ford failed to 

present any empirical evidence 

demonstrating a likelihood of migration 

of customers from music services paying 

higher royalty fees to the PSS as a result 

of his perceived royalty imbalance.68 Dr. 

Ford’s conclusion that the current rate 

paid by the PSS for the Section 114 

license has caused a disruption to the 

music industry is mere speculation. 

Music Choice also contends that the 

current rate is disruptive, and I likewise 

find its argument weak and 

unsubstantiated. The test for 

determining disruption to an industry, 

announced by the Judges in SDARS–I, is 

whether the selected rate directly 

produces an adverse impact that is 

substantial, immediate, and irreversible 

in the short-run. SDARS–I, 73 FR at 

4097. The current rate has been in place 

for some time and, despite Music 

Choice’s protestations that it has never 

been profitable, it continues to operate 

and continues to increase its 

expenditures by expanding and 

enhancing its services in the face of the 

supposedly disruptive current royalty 

rate. Music Choice’s argument that 

DMX’s bankruptcy and Muzak’s 

decision to limit its participation in the 

PSS market are evidence of the onerous 

burden of the current rate are without 

support because Music Choice has 

failed to put forward any evidence 

demonstrating a causal relationship 

between the actions of those services 

and the PSS royalty rate. 

In sum, I am not persuaded by the 

record testimony or the arguments of the 

parties that the current PSS rate is 

disruptive to a degree that necessitates 

an adjustment. 

5. Conclusions Regarding Section 114 

Rates 

Upon a careful weighing of the 

evidence submitted by the parties, I 

believe that the application of the 

Section 801(b) factors to the rate of 7.5% 

of Gross Revenues requires an upward 

adjustment to account for the coming 

expanded use of music by Music Choice 

in the 2013–2017 licensing term. If the 

Judges preferred per-usage royalty 

metric could be applied to the PSS— 

which it cannot—the value of the 

increased usage would be captured in 

the metric through the measurement of 

listenership to the sound recordings 

received by Music Choice consumers 

through their respective cable systems. 

The percentage-of-revenue metric, 

however, will not account for the 

expanded use in the short term, as cable 

operators will continue to pay fees for 

the Music Choice service in 

approximately the same amounts, and 

will only increase in the long term, 

presumably, if the volume of cable 

subscribers (or per-subscriber license 

rates) increases significantly. The 

testimony, however, suggests this 

possibility to be unlikely, as Music 

Choice itself declares the PSS market 

mature. 8/16/12 Tr. 3855:17–3856:7 (Del 

Beccaro); 8/23/12 4707:8–19 (Crawford). 

The following are the rates that I 

believe are appropriate and supported 

by the evidence in this proceeding: for 

2013: 8.5%; for 2014: 9.0%; for 2015: 

9.5%; for 2016: 9.5%; and for 2017: 

9.5%. 

SoundExchange raises an additional 

matter with respect to the total royalty 

obligation of the PSS. Though not 

technically a rate, nor strictly an 

amendment of Gross Revenues, 

SoundExchange requests a means for 

capturing revenues from cable systems 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23087 

69 Dr. Noll also examined agreements involving 

the music services Slacker and Turntable. 

that are owners of equity or capital 

interests in Music Choice who do not 

engage in arm’s length transactions with 

Music Choice for its product offerings. 

Second Revised Proposed Rates and 

Terms, at 6–7 (Sept. 26, 2012). Put 

another way, SoundExchange seeks to 

capture any price break that Music 

Choice offers its ownership partners for 

the Music Choice service. The price 

break to a specific partner cable system 

would be calculated by multiplying the 

total number of subscribers for the 

month for that system by the average 

per-subscriber royalty payment of the 

five largest paying cable systems 

providing Music Choice that are not its 

partners. This reconciling for each 

partner cable system would then be 

added to Music Choice’s Gross 

Revenues overall calculation. In support 

of its ‘‘Non Arm’s Length Transaction’’ 

adjustment for cable partners, Dr. Ford 

testified that a straight percentage of 

revenue metric is problematic where 

Music Choice offers per-subscriber rate 

discounts to it cable partners. ‘‘I believe 

that, if we are going to properly 

compensate someone for the use of their 

property, we ought to be compensating 

them for use and not have the 

compensation affected by peculiar 

ownership structure of the entities that 

easily arise.’’ 8/20/12 Tr. 4216:21– 

4217:8 (Ford). Over half of Music 

Choice’s non-partner cable systems pay 

approximately [REDACTED] per 

subscriber per month in licensing fees to 

Music Choice, whereas the partner cable 

systems pay only [REDACTED] per 

subscriber per month. Ford Second 

Corrected WDT at 5, SX Trial Ex. 244. 

I am not persuaded that a ‘‘Non Arm’s 

Length Transaction’’ adjustment is 

warranted. Implicit in Dr. Ford’s 

observation of Music Choice’s licensing 

of its service to its cable partners is the 

assumption that the partners have the 

ability to exert downward pressure on 

Music Choice revenues so as to avoid 

payment of music royalties and thereby 

boost their own bottom-lines. Such 

presumed use of Music Choice as a loss 

leader is not borne out by the evidence 

in this proceeding. The partnership 

agreements between Music Choice and 

its cable operators are lengthy and 

complicated and vary from partner to 

partner. It is not surprising that the 

partner cable operators, which are in 

most instances of greater size with 

respect to numbers of subscribers than 

the non-partner licensors of Music 

Choice’s service, would be able to 

negotiate lower per-subscriber licensing 

fees due to their ability to deliver more 

subscribers to the service. Further, the 

cable partners represent only a third of 

Music Choice ownership, and do not 

appear to be able to influence rates any 

more than Music Choice’s record 

company partners, who own one quarter 

of the company. 6/11/12 Tr. 1454:16–22 

(Del Beccaro). SoundExchange’s ‘‘Non 

Arm’s Length Transaction’’ adjustment 

is founded upon inference and 

speculation and is not supported by the 

record evidence. 

E. The Section 114 Royalty Rates for 

SDARS 

As with the consideration of 

reasonable rates for the PSS, I begin my 

analysis for SDARS with the proffered 

benchmarks of Sirius XM and 

SoundExchange, respectively. 

1. SDARS Proposed Benchmarks 

a. The Direct Licenses 

Beginning in the summer of 2010, 

Sirius XM commenced a coordinated 

effort to negotiate sound recording 

performance rights directly with 

individual record labels. 6/7/12 Tr. 

669:8–672:9, 713:3–11, 714:11–715:4 

(Frear). Dubbed the Direct License 

Initiative, Sirius XM first attempted to 

engage the four major record companies 

in discussions but was unsuccessful. Id.; 

6/11/12 Tr. 1347:7–21, 1348:20–1349:4 

(Karmazin). Sirius XM then enlisted the 

services of Music Reports, Inc. (‘‘MRI’’) 

to formulate and execute a direct 

licensing strategy with as many 

independent record labels as possible. 

Together, Sirius XM and MRI developed 

the terms and conditions of a Direct 

License, the highlights of which 

include: 

• A pro rata share of 5%, 6%, or 7% 

of gross revenues, defined by reference 

to 37 CFR 382.11; 

• A grant of rights to Sirius XM to 

operate all of its various services 

(satellite radio plus other services such 

as webcasting); 

• ‘‘Additional functionality’’ granted 

to Sirius XM, including elimination of 

the Section 114 license sound recording 

performance complement; 

• Direct, quarterly payment of 100% 

of the royalties to the record label; 

• Payment of advances to the 5 largest 

record labels; 

• The possibility, but not the 

promise, of increased play on Sirius 

XM’s music services. 

Gertz Corrected WDT ¶ 14(a), (b), SXM 

Dir. Trial Ex. 5. The first Direct Licenses 

were executed in August of 2011 and by 

the time of the closing of testimony in 

this proceeding, Sirius XM had Direct 

Licenses with 95 independent record 

labels. 8/13/12 Tr. 3015–16–20 (Frear); 

8/15/12 Tr. 3679:22–3680:1 (Gertz). 

Sirius XM’s expert economist, Dr. 

Roger Noll, advises that the 95 Direct 

Licenses are the best benchmark for rate 

setting in this proceeding because, 

unlike in SDARS–I, the Judges now have 

direct evidence of competitively 

negotiated marketplace rates for the 

exact service at issue in this proceeding. 

Noll Revised Amended WDT at 7, 11, 

33–36, SXM Dir. Trial Ex. 1. Dr. Noll 

testified that the Direct Licenses are 

representative, for benchmarking 

purposes, of the types of sound 

recordings available across the industry, 

including those distributed by major 

labels. Id. at 39–44; see also 6/5/12 Tr. 

261:6–262:14 (Noll)(the 95 Direct 

Licensors as a group offer a scope of 

sound recordings comparable to those 

not so licensed). The fact that the Direct 

Licenses represent only a small 

percentage of market share of music 

available does not alter the incentive to 

create demand diversion, Dr. Noll 

opines, because the major record labels 

and the independent labels signed to the 

Direct Licenses both seek to maximize 

their number of plays on Sirius XM’s 

music services. A Direct Licensor would 

find a 7% license rate more attractive 

than the current 8% statutory rate if the 

lower rate would cause an increase in 

the number of plays. Noll Revised 

Amended WDT at 40–41, SXM Dir. Trial 

Ex. 1. Dr. Michael Salinger, another 

Sirius XM expert economist, concludes 

that the fact that 95 record companies 

accepted the Direct License offer 

suggests that the current 8% statutory 

rate is, if anything, above the 

competitive rate for sound recordings. 

Salinger Corrected WRT at ¶ 28, SXM 

Reb. Trial Ex. 9. Further, Sirius XM 

argues that the number of Direct 

Licenses undoubtedly would have been 

higher but for the efforts of 

SoundExchange, the American 

Association of Independent Musicians 

and others to undermine and interfere 

with its Direct License Initiative. Sirius 

XM devoted considerable time and 

testimony in an effort to support this 

contention. See, e.g., Sirius XM PFF at 

61–63. 

b. The Noll Benchmark 

Dr. Noll asserts that license 

agreements between major record labels 

and certain customized non-interactive 

webcasters provide marketplace 

evidence of rates that corroborate the 

5%–7% rates achieved in the Direct 

Licenses. Noll Revised Amended WDT 

at 16, 72, SXM Dir. Trial Ex. 1. Focusing 

principally on the agreements between 

the digital music service Last.fm and the 

four major record companies,69 Dr. Noll 

mstockstill on DSK4VPTVN1PROD with RULES3

23088 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

70 Dr. Noll also found similar splits in 

[REDACTED] agreements. Id. at Tables 2.2–2.2d and 

Appendices I–L. 

71The ‘‘greater of’’ metric is an amount per play, 

an amount per-subscriber, and a percentage of the 

service’s revenues. 6/14/12 Tr. 2261:7–2262:4 

(Ordover). 

72 Dr. Ordover’s mathematical calculation is as 

follows: He took the $12.95 Sirius XM subscription 

price, and then multiplied that by 50% to obtain the 

music portion of the subscription price of $6.475. 

He then multiplied the music-only satellite radio 

subscription price by 60% to 65% (his effective 

percentage-of-royalty derived from the interactive 

subscription service agreements) to obtain the 

music royalty of $3.88 to $4.21. Finally, he divided 

those numbers into the Sirius XM subscription 

price for the Select programming package to obtain 

30% to 32.5%. 8/16/12 Tr. at 3794:13–3795:9 

(Salinger). 

73The current price for this service is $14.49. 

Ordover Third Corrected/Amended WDT at 31 n.33, 

SX Trial Ex. 74. 

74 Dr. Ordover did not provide a weighted average 

of the non-interactive service prices because he 

concluded that he did not have reliable data, nor 

did he include, at my invitation, ad-supported noninteractive services in his calculation, deciding that 

such services would add undue complexity to his 

methodology. Ordover Amended WRT at 33, SX 

Trial Ex. 218. 

determined that for its non-interactive 

subscription streaming service, Last.fm 

agreed to pay: 

• [REDACTED] 

• [REDACTED] 

• [REDACTED] 

Noll Revised Amended WDT at 76–79 

(footnote omitted), Tables 2.1–2.1c and 

Appendices E–H, SXM Dir. Trial Ex. 1. 

Examining these same agreements for 

Last.fm’s interactive on demand 

service—[REDACTED]—led Dr. Noll to 

conclude that sound recording rights 

owners charge [REDACTED] for noninteractive services than they do for 

interactive/on-demand services. Id.70

Using the rates gleaned from the 

Last.fm agreements for the noninteractive subscription streaming 

service, which he deemed to be the most 

similar to Sirius XM’s satellite radio 

service in terms of functionality, Dr. 

Noll computed his reasonable royalty 

fee by multiplying the Last.fm revenue 

rate [REDACTED] against the implicit 

per-subscriber price of Sirius XM’s 

music channels ($3.00–$3.45), and then 

divided the resulting per-subscriber 

monthly fee into Sirius XM’s average 

revenue per user ($11.38) in order to 

express the fee as a percentage of 

revenue. Id. at 15; 6/5/12 Tr. 285:7– 

293:9 (Noll). This yielded an average 

royalty rate as a percentage of Sirius XM 

revenue of 6.76%. Id. at 90; 6/5/12 Tr. 

293:5–9 (Noll). Because this average rate 

fit squarely between the 5%–7% range 

of the Direct Licenses, Dr. Noll opines 

that his calculation is corroborative of 

the rates contained in Direct Licenses 

and further concludes that it represents 

the upper end of a reasonable royalty 

rate because the customized, noninteractive services he examined offer 

greater functionality and sound quality 

than the channels offered by Sirius XM. 

Id. at ¶¶ 14–16; 6/5/12 Tr. 292:2–14 

(Noll). 

2. SoundExchange Proposed 

Benchmarks 

SoundExchange’s expert economist, 

Dr. Janusz Ordover, offers a principal 

benchmark, and two alternatives, based 

upon his examination of market 

agreements for digital music between 

interactive subscription services 

streaming music and the four major 

record companies. Dr. Ordover chose 

interactive subscription services 

because of his belief that they represent 

voluntary transactions in a competitive 

marketplace free of regulatory overhang, 

provide sufficient information based on 

multiple buyer/seller interactions, are 

not distorted by the exercise of undue 

market power on either the buyer’s or 

seller’s side, and involve digital music 

services that are similar to Sirius XM. 6/ 

14/12 Tr. 2359:11–2360:9, 2257:5–11, 

2257:12–20, 2257:21–2258:2 (Ordover). 

Dr. Ordover’s principal benchmark is 

to calculate the percentage of total 

revenues represented by royalty 

payments made by interactive services 

to record companies, and then apply 

that percentage of revenue to the 

amount that he determined to be the 

retail price of a music-only satellite 

service in order to calculate the 

corresponding percentage-of-revenue for 

the Sirius XM service. See generally 

Ordover Third Corrected/Amended 

WDT at 18–25, SX Trial Ex. 74. 

Beginning with data from July 2010, he 

derived the effective percentage-ofrevenue paid by each interactive service 

by taking the amount of royalty fees 

paid to the major record labels and 

dividing it by each service’s gross 

subscription revenues. In other words, 

he relied on royalty payments made, 

rather than the percentage-of-revenue 

rates specified in the agreements which 

contained ‘‘greater of’’ royalty 

formulations.71 In calculating actual 

licensing fees paid, Dr. Ordover used 

gross subscription revenues of the 

interactive services without any 

deductions or carve-outs. Ordover Third 

Corrected/Amended WDT at 19, SX 

Trial Ex. 74. Examining the agreements, 

he determined that the annual payments 

as a percentage of gross revenues of the 

services ranged from 50% to 70%, and 

tended to cluster in a narrower range of 

60% to 65%. 6/14/12 Tr. 2275:4–12 

(Ordover); Ordover Third Corrected/ 

Amended WDT at 19–21, SX Trial Ex. 

74. Dr. Ordover then adjusted the 

benchmark to account for the fact that 

the Sirius XM satellite radio service, 

unlike interactive subscription services, 

transmits both music and non-music 

content. Reducing the percentage-ofrevenue by half, principally based upon 

his observation of the identical $9.99 

retail prices offered by Sirius XM for 

non-music and mostly music standalone subscriber packages, yielded rates 

for Sirius XM between 30% and 32.5% 

for the 2013–2017 statutory licensing 

period. Ordover Third Corrected/ 

Amended WDT at 17, SX Trial Ex. 74.72

As his first alternative benchmark, Dr. 

Ordover examines per-subscriber 

royalty rates from interactive 

subscription services in an effort to 

account for the differences in service 

attributes between satellite radio and 

interactive subscription services. He 

first determined an unweighted average 

monthly royalty of $5.95 per subscriber 

(monthly licensing fees paid divided by 

monthly subscriber counts) for 

interactive services, and then adjusted 

this fee by the ratio of the retail price 

of a hypothetical music-only satellite 

radio service (50% of the $12.95 

subscription price for the Sirius XM 

Select programming package 73) to the 

retail price for interactive subscription 

services ($9.99). Ordover Third 

Corrected/Amended WDT at 30–31, SX 

Trial Ex. 74. This percentage, when 

applied to the average per-subscriber 

royalty paid by interactive services 

($5.95), yields $3.86 for the hypothetical 

music-only satellite radio service. 

Dividing this number by the $12.95 

Sirius XM subscription price provides a 

percentage-of-revenue rate of 29.81%. 

Id. at 32. 

Dr. Ordover’s second alternative 

benchmark approach attempts to adjust 

for the presence of interactivity alone in 

the rates yielded by his primary 

benchmark under the assumption that 

interactivity is the material difference 

between interactive subscription 

services and satellite radio. Ordover 

Third Corrected/Amended WDT at 34, 

SX. Trial Ex. 74. To derive the value of 

interactivity, he compared the retail 

prices for interactive music streaming 

services with the retail prices for noninteractive music streaming services in 

order to obtain a ratio. He determined 

that interactive music streaming 

services are uniformly priced at $9.99 

per month, while non-interactive 

services prices averaged $4.86. Ordover 

Third Corrected/Amended WDT at 31– 

32 Table 4, SX Trial Ex. 74; Id. at 33 

Table 5.74 Dr. Ordover then used the 

ratio to adjust the average per-subscriber 

royalty paid by interactive services 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23089 

75This was calculated by multiplying the 

interactivity ratio of .4865 ($4.86/$9.99) to the 

average per-subscriber royalty payment of $5.95, 

yielding an equivalent satellite radio payment of 

$2.89. The $2.89 per-subscriber rate was then 

divided by the $12.95 monthly charge for the Sirius 

XM Select satellite radio package, resulting in the 

percentage-of-revenue rate of 22.32%. 

76 I note, further, that the works licensed under 

the Direct Licenses represent no more than 2%–4% 

of the total number of works performed by Sirius 

XM. Ordover Amended WRT at 4–5, SX Trial Ex. 

218; 6/6/12 Tr. 308:3–5 (Noll). 

77 Dr. Noll’s citation to Direct Licensors’ 

catalogues containing Broadway recordings, three 

former hit singles, and the recordings of George 

Carlin, as confirmation of the popularity of the 

works of the Direct Licensors overall, is not 

persuasive. 

78 I recognize that direct payment to the Direct 

Licensors does not relieve them of their royalty 

obligations to their artists and performers; however, 

receipt of 100% of the royalties upfront is clearly 

attractive to certain record labels and was a selling 

point in negotiations with independent record 

labels. Powers WDT at 4–5, SX Trial Ex. 243. 

79 Dr. Noll also offers his demand diversion 

theory as an explanation as to why SoundExchange 

allegedly attempted to interfere with Sirius XM’s 

Direct License Initiative. 

($5.95) to calculate an equivalent 

payment for satellite radio. This yielded 

a percentage-of-revenue royalty rate of 

22.32% for Sirius XM, which Dr. 

Ordover concludes represents the lower 

bound of a reasonable royalty rate. 6/14/ 

12 Tr. 2282:12–16 (Ordover).75

3. Analysis and Conclusions Regarding 

the Proposed Benchmarks 

The Direct Licenses offered by Sirius 

XM have the surface appeal of a good 

benchmark in that they involve the 

same sellers and buyers in the target 

market; however, a closer examination 

reveals that they are fraught with 

problems. First, they represent a sliver 

of the universe of rights holders for 

sound recordings: 95 of over 20,100 

rights holders to which SoundExchange 

distributes payments, Bender WDT at 4, 

SX Trial Ex. 75, and a subset of the 691 

independent labels that Sirius XM 

approached in the first instance. 

Ordover Amended WRT at 4 n.8, and 6, 

SX Trial Ex. 218; SX Trial Ex. 301 at 53. 

Much was made by Sirius XM in this 

proceeding that the number of Direct 

Licenses would have been substantially 

higher but for the interference of 

SoundExchange. It is not within the 

Judges’ jurisdiction to determine that 

SoundExchange’s actions amounted to 

legal interference with contractual 

relations or otherwise frustrated Sirius 

XM’s efforts to execute more Direct 

License agreements. The Direct Licenses 

are evaluated for what they are, not for 

what they might have been, and what 

they are is a very small percentage of the 

sound recording market.76

Second, the Direct Licenses do not 

include any of the major record labels 

whom, by virtue of their size of the 

music market and the popularity of their 

recordings, Sirius XM cannot do 

without. Dr. Noll’s observation that the 

works licensed by the Direct Licensors 

are representative of the kinds of sound 

recordings available to Sirius XM in the 

market is beside the point, for the 

Judges have concluded before that 

sound recordings, particularly those of 

the major record labels, are not readily 

substitutional for one another, let alone 

with those of independent record labels. 

Phonorecords I, 74 FR 4510, 4519 (Jan. 

26, 2009); see, generally Webcaster I, 72 

FR 24084 (May 1, 2007). The 

‘‘representativeness’’ of the sound 

recordings contained in the catalogs of 

the Direct Licensors do not equate to 

their popularity,77 an essential 

ingredient to Sirius XM’s music 

offerings. 6/7/12 Tr. 836:17–22 

(Gertz)(‘‘Sirius XM is very hits driven, 

and they want to have the most 

successful service they can, so they’re 

going to use what’s popular.’’). 

Third, I am troubled by the additional 

considerations and rights granted in the 

Direct Licenses that are beyond those 

contained in the Section 114 license, 

thereby weakening their comparability 

as a benchmark. The Direct Licenses 

provide for payment of 100% of the 

royalties to the Direct Licensors, 6/6/12 

Tr. 341:10–342:3 (Noll), thereby 

avoiding the statutory apportionment of 

50% to record companies and 50% to 

artists and performers.78 17 U.S.C. 

114(g)(2). Certain of the Direct Licenses, 

in particular those of the largest 

independent labels, provide for cash 

advances and accelerated royalty 

payments, also not available under the 

statutory license. See, e.g., Gertz 

Revised WRT at SXM Reb. Ex. 23, pp. 

3–4, SXM Reb. Trial Ex. 8; Gertz 

Revised WRT at SXM Reb. Ex. 8, pp. 3– 

4, SXM Reb. Trial Ex. 8. Sirius XM 

absorbs all of the administrative costs of 

the licensing process under the Direct 

Licenses, which under the statutory 

license are borne by the copyright 

owners, artists and performers. 

Eisenberg Amended/Corrected WRT at 

SX Ex. 313–RR, SX Trial Ex. 245. And 

with respect to rights granted under the 

Direct Licenses, Sirius XM receives a 

waiver of the sound recording 

complement of the statutory license, 

and the ability to perform the works of 

the Direct Licensors on other services 

not covered by the statutory license. 

My concerns regarding the Direct 

Licenses are not cured by Dr. Noll’s 

analyses. Dr. Noll contends that the fact 

the Direct License rates are lower than 

the current 8% statutory rate is 

explained by a demand diversion 

effect—record labels engaging in price 

competition aimed at increasing their 

market share through increased plays on 

Sirius XM, thereby reducing the royalty 

rates demanded—and represents what 

would happen in the market as a whole 

in the absence of a statutory rate. Noll 

Revised Amended WDT at 36–38, SXM 

Dir. Trial Ex. 1.79 His demand diversion 

theory, however, has limited 

explanatory power. It may well be that 

independent record labels took the 

Direct License offer because of the 

valuable non-statutory benefits 

discussed above, and there is testimony 

in the record to this effect. See, e.g., SX 

Trial Ex. 317 at SXM– 

CRB_DIR_00079565; 8/20/12 Tr. 

4156:5–4157:3 (Powers). Further, 

independent labels have greater 

concerns than majors in securing 

performances of their works on services 

such as Sirius XM, increasing the 

attractiveness of a Direct License 

relationship. Powers WRT at 4, SX Trial 

Ex. 243; Eisenberg Amended/Corrected 

WRT at SX Ex. 329–RR, p. 

SXM_CRB_DIR_00042287, SX Trial Ex. 

245 (email from MRI to independent 

label emphasizing that a Direct License 

offers the possibility of increased 

airplay). The incentive of increased 

airplay does not necessarily exist for 

major record labels, whose works are 

already performed in large numbers by 

Sirius XM’s hits-driven programming. 

Harrison Corrected WRT at 9–10, PSS 

Trial Ex. 32. 

Dr. Noll’s benchmark analysis, 

whether considered as corroboration of 

the Direct Licenses or stand-alone, 

contains significant flaws. His reliance 

on the Last.fm agreements with the four 

major record labels, which provide the 

critical data to his calculations, is valid 

to the extent that it is representative of 

non-interactive subscription webcasting 

services. See SDARS–I, 73 FR at 4090. 

Two of the agreements, however, have 

expired and are no longer in effect. 

Ordover Amended WRT at 25, SX Trial 

Ex. 218. Last.fm now pays those record 

companies at the statutory webcasting 

rate, which is not a per se market rate. 

8/14/12 Tr. 3308:8–20, 3317:10–16 

(Ordover). Even if the Last.fm 

agreements were the most representative 

of webcasting services—and Dr. Noll 

has not demonstrated that they are—I 

would not be inclined to accept them as 

fully comparable to the SDARS business 

without some adjustment for the 

functional differences between 

webcasting and satellite radio. No 

persuasive adjustment was offered. 

I also have reservations about Dr. 

Noll’s determination of $3.00–$3.45 as 

mstockstill on DSK4VPTVN1PROD with RULES3

23090 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

80The implicit monthly price is applied to the 

effective percentage-of-revenue rate of [REDACTED] 

from the Last.fm agreements that serve as the 

numerator in Dr. Noll’s calculation. 

81Likewise, Sirius XM has failed to demonstrate 

that it could successfully substitute away to other 

providers of music. If that were the case, Sirius XM 

could have operated its business under the Direct 

Licenses, for example, and avoided participation in 

this proceeding altogether. 

82 Dr. Noll identifies the non-interactive music 

services offered by Pandora, whom he categorizes 

as the ‘‘big elephant in the room,’’ as highly 

comparable to the satellite radio service of Sirius 

XM. 6/5/12 Tr. 286:21–287:7 (Noll). While his 

comparison is to the compatible features of 

Pandora, the parties have interjected and argued the 

royalty rates paid by Pandora for its music services. 

I am expressly not considering the rates, terms or 

conditions of Pandora’s royalty payments in 

relation to the rates in this proceeding, for to do so 

would violate the terms of the Webcaster Settlement 

Act of 2009. See 17 U.S.C. 114(f)(5). 

83 Dr. Noll also considered agreements involving 

Slacker and Turntable, but only used the Last.fm 

agreements in his analysis. As Sirius XM 

acknowledges, the Slacker and Turntable services 

are more interactive than Last.fm, thereby 

weakening their comparability. Sirius XM RFF ¶ 64. 

84Sirius XM makes much of the fact that rates 

obtained by the major record labels have dropped 

the implicit monthly market price for 

Sirius XM’s music channels.80 Dr. Noll 

identified three methods for 

determining the implicit price. The first 

is the average retail price of $3.15 taken 

from Last.fm’s and Pandora’s noninteractive subscription services. Noll 

Revised WRT Table 1, SXM Reb. Trial 

Ex. 6. As with Last.fm, there is no 

adjustment to account for functional 

differences between the Pandora 

webcasting service and satellite radio, 

whose primary use is in the automobile. 

The second is to derive a market price 

for Sirius XM using a survey conducted 

by Sirius XM’s witness Professor John 

Hauser that attempts to measure the 

value of music to Sirius XM subscribers. 

Professor Hauser posited an anchor 

price for the Sirius XM service to his 

survey respondents, and then randomly 

removed features (such as lack of 

commercials, quality of sound, etc.) to 

determine how much the respondents 

would be willing to pay for the service 

after each feature is removed. After 

averaging the results, he determined 

that subscribers place an average value 

on Sirius XM’s music channels of $3.24. 

Hauser Corrected WDT at Appendix G, 

SXM Dir. Trial Ex. 24. Professor 

Hauser’s survey is of limited value. By 

design, the higher number of features or 

attributes of the Sirius XM service 

included in the survey, the lower the 

estimated value of any given service. 

This produces anomalous results, such 

as his survey showing that subscribers 

would pay a certain amount for 

ubiquitous station availability, premium 

sound quality and absence of 

commercials all without any 

programming content whatsoever. 

Ordover Amended WRT at 35, SX Trial 

Ex. 218. 

Third, Dr. Noll sought to calculate the 

cost of inputs necessary for delivery of 

Sirius XM’s programming via satellite 

and its subsidization/installation of 

radio receivers in automobiles 

(described as ‘‘unique’’ costs to the 

satellite radio service), to then deduct 

those costs from gross revenues, and 

allocate the remaining revenue between 

music and non-music content. Noll 

Revised Amended WDT at 81–83, 85, 

SXM Dir. Trial Ex. 1. After making these 

calculations, Dr. Noll credited 55.1%, or 

$3.45, to music channels. Id. at 88 and 

Table 3. Sirius XM contends that 

including the unique delivery costs and 

investments of its service is appropriate 

in Dr. Noll’s calculation, and cites to 

major record company agreements with 

Cricket and MetroPCS (mobile service 

providers that bundle telephone service 

and interactive music service into a 

single package) that reflect that a 

percentage royalty rate for music must 

be reduced by a commensurate 

proportion to reflect revenue collected 

for the non-music portion of the 

bundled service. Sirius XM PFF ¶¶ 169– 

173. However, SoundExchange’s expert 

economist, Dr. Thomas Lys, explained 

that because most of the unique costs 

that Dr. Noll allocated are relatively 

fixed, the per-subscriber amounts vary 

inversely with the number of 

subscribers. Lys WRT at 57, SX Trial Ex. 

240. Dr. Noll performed his calculation 

of costs using 2010 data, but had he 

used subscriber numbers for the years 

thereafter which have continued to 

increase and are anticipated to increase 

further in the coming licensing term, the 

analysis would show lower unique costs 

per subscriber and a higher value of 

music. Lys WRT at 57, SX Trial Ex. 240. 

The dependency of Dr. Noll’s 

methodology on timing and the number 

of subscribers undermines its reliability 

for quantifying what the unique costs 

are likely to be in the coming rate term. 

Id. at 58. Moreover, Sirius XM’s analogy 

to the bundled services of Cricket and 

MetroPCS is inapposite. Unlike those 

services, the success of Sirius XM is 

dependent upon its access to music. 6/ 

14/12 Tr. 2270:7–2271:15 (Ordover); see 

also 6/5/12 Tr. 235:6–10 (Noll)(‘‘It’s a 

bundle of services, it’s a distribution 

system, a bunch of nonmusic content 

and a bunch of music content, all of 

which are essential. And you pull the 

plug on any one of them, and the whole 

thing collapses.’’); 6/11/12 Tr. 1431:10– 

17 (Karmazin). The value of Sirius XM’s 

satellite radio service is the bundling of 

music and non-music content with its 

delivery platform, and Sirius XM has 

failed to present convincing evidence 

that its delivery platform and non-music 

content, alone, present a viable 

business.81

In sum, these concerns, coupled with 

those surrounding the Direct Licenses 

themselves, do not inspire confidence 

that the Direct Licenses are the best 

benchmark for rate setting in this 

proceeding. Rather, I believe that the 

rates between 5% and 7% contained in 

the Direct Licenses mark the lower 

boundary of the range of reasonable 

rates to be determined in this 

proceeding. The evidence presented 

establishes that reasonable rates cannot 

be lower. I now examine the 

benchmarks offered by SoundExchange 

and Dr. Ordover. 

As an initial matter, the Judges have 

determined in the past that the 

interactive subscription service market 

is a benchmark with characteristics 

reasonably comparable with noninteractive SDARS. SDARS–I, 73 FR at 

4093. Sirius XM, however, charges that 

Dr. Ordover began his analysis in the 

wrong place by examining rates for 

interactive services instead of noninteractive services. I do not agree. In 

saying this, I do not suggest that the 

market for interactive services, in and of 

itself, offers the best benchmark from 

which to begin an analysis of reasonable 

rates for Sirius XM’s satellite radio 

service. Adjustments, as discussed 

below, are necessary for the benchmark 

to be at all useful. However, as a starting 

point, the interactive subscription 

service market is more illustrative of a 

competitive marketplace (willing buyer/ 

willing seller) than the non-interactive 

subscription service market, where 

negotiated rates are likely influenced by 

the availability of the statutory licensing 

regime for webcasting. See Webcasting 

III, 76 FR 13026 (Mar. 9, 2011)(citing 

Noncommercial Educational 

Broadcasting Compulsory License, Final 

rule and order, 63 FR 49823, 49834 

(Sept. 18, 1998))(‘‘[I]t is difficult to 

understand how a license negotiated 

under the constraints of a compulsory 

license, where the licensor has no 

choice to license, could truly reflect ‘fair 

market value.’ ’’). Furthermore, the 

agreements examined by Dr. Ordover 

represent a more robust data source 

from which to consider the outcomes of 

marketplace negotiations, as opposed to 

Dr. Noll’s confined use of only the 

Last.fm agreements.82, 83 His observation 

of a clustering of effective percentage of 

revenue rates between 60% and 65% for 

interactive subscription services is 

supported by empirical evidence and is 

not misleading or under inclusive.84

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23091 

almost 20% since SDARS–I and argues that this 

logically must mean that music is worth less than 

in the prior proceeding. Sirius XM PFF ¶ 339. 

SoundExchange counters that the reason for the 

20% drop is the decline in retail prices for 

interactive services, which SoundExchange 

concludes is an indication that consumers value 

interactivity less than before. SX RFF ¶ 145. Neither 

side provided empirical evidence to prove their 

point, and logic does not dictate that music is of 

any less, or more, value as a result of this 

occurrence. 

85The five non-interactive services selected by 

Dr. Ordover listed one retail price for two services, 

two retail prices for one service, and three retail 

prices for two services. Ordover Third Corrected/ 

Amended WDT at ¶ 54, Table 5, SX Trial Ex. 74. 

The differing prices reflect differing duration 

commitments for subscribers. 

86While I am adopting these adjustments to Dr. 

Ordover’s second alternative benchmark, I 

underscore that I am not adopting Dr. Noll’s 

recommended use of the Last.fm non-interactive 

percentage rate (26.1%) for the same reasons that 

a five-year old agreement with two major record 

labels did not make for a useful benchmark. 

87This is calculated by multiplying the 

interactivity ratio of .3153 ($3.15/$9.99) to the 

average per-subscriber royalty payment of $5.95, 

yielding an equivalent satellite radio payment of 

$1.87. The $1.87 per-subscriber rate is then divided 

by Sirius XM’s ARPU ($11.49), resulting in the 

percentage-of-revenue rate of 16.2%. 

Ordover Third Corrected/Amended 

WDT at 21 Table 1, 26, Table 2, SX Trial 

Ex. 74. 

I am not persuaded that Dr. Ordover’s 

perceived ‘‘failure’’ to incorporate the 

costs of Sirius XM’s satellite delivery 

platform renders his interactive 

subscription services benchmark fatally 

flawed or in need of adjustment. Dr. 

Noll asserts that the Sirius XM satellite 

radio service should be viewed as a 

bundle of three inputs—music content, 

non-music content, and the satellite 

platform for delivering the content—and 

attempts to separately value each 

component of the bundle. Noll Revised 

Amended WDT at 80, SXM Dir. Trial 

Ex. 1. Consumers do not value the 

satellite platform independent of the 

content it transmits, 6/7/12 Tr. 666:5–11 

(Frear), and Sirius XM has not 

successfully demonstrated that the 

satellite platform can be unbundled and 

sold separately. See SDARS–I, 73 FR at 

4089; see also Ordover Amended WRT 

at 33, SX Trial Ex. 218 (Cricket license 

agreements reflect that its delivery 

system provides services that have 

independent value to consumers). The 

value of Sirius XM’s service is the end 

product to the consumer, as is the case 

with the interactive subscription service 

consumer, and no adjustment for the 

delivery mechanism is necessary. 

To be sure, the rights licensed by 

interactive subscription services are not 

the same as those by non-interactive 

services such as the SDARS, and 

adjustment to the interactive benchmark 

is necessary to account for these 

differences. See SDARS–I, 73 FR at 

4093. Dr. Ordover attempted to account 

for these differences by offering two 

alternative benchmarks. His first 

alternative begins with the average 

monthly per-subscriber fee paid by 

interactive services and reduces that fee 

in proportion to the ratio of the retail 

price of Dr. Ordover’s hypothetical 

music-only satellite radio service to the 

retail price of interactive services. There 

are doubts as to whether this approach 

accurately adjusts the interactive service 

benchmark to account for differences in 

attributes and functionality between 

interactive subscription services and 

satellite radio, and SoundExchange 

backed away from advocacy of this 

model in its post-trial submissions. I 

focus, instead, on Dr. Ordover’s second 

alternative approach, which begins with 

the average monthly per-subscriber fee 

paid by interactive services ($5.95) and 

then reduces that fee in proportion to 

the ratio of the average retail price of 

non-interactive music services to the 

retail price of the interactive services 

($4.86/$9.99). Ordover Third Corrected/ 

Amended WDT at 34, SX Trial Ex. 74. 

It is readily apparent that Dr. 

Ordover’s interactivity adjustment to his 

interactive subscription services 

benchmark in this proceeding is not the 

same as the one he performed in 

SDARS–I. Dr. Ordover based his 

adjustment in SDARS–I on per-play 

rates from non-interactive video 

streaming services, a market that both 

parties concede effectively no longer 

exists. SX RFF at 164; 8/15/12 Tr. 

3573:22–3574:3 (Noll). However, I am 

not persuaded that the difference— 

using retail prices for non-interactive 

services in this proceeding rather than 

per-play rates—renders his analysis 

invalid. A straightforward comparison 

of per-play rates in the interactive and 

non-interactive markets would be 

flawed, in that it would not account for 

differences in intensity of use (average 

number of plays per subscriber) between 

the markets, and would involve analysis 

of non-interactive rates from a market 

subject to influences of the statutory 

license. Comparing retail prices between 

the markets, as Dr. Ordover does, is a 

reasonable approach as the value of 

interactivity to consumers will likely be 

reflected in retail prices. 8/16/12 Tr. 

3836:5–11 (Salinger). 

While I find Dr. Ordover’s comparison 

of retail prices in the interactive and 

non-interactive markets conceptually 

sound, his analysis is not without warts. 

In deriving his average non-interactive 

service price for the five non-interactive 

services he examined, Dr. Ordover’s 

averaging technique placed greater 

weight on the higher-priced services.85

A more accurate method for calculating 

the average price is to include a single 

time-frame observation—the price of a 

year of service—for each of the five 

services. This procedure reduces the 

average price to $4.01. Noll Revised 

WRT at 25, SXM Reb. Trial Ex. 6. Dr. 

Ordover also did not weight his average 

by the number of subscribers to each 

service to account for differences in 

popularity, presumably because data 

was not available for all five services. It 

exists, however, for Pandora, Last.fm 

and Live365. I accept Dr. Noll’s 

weighted adjustment to $3.15 because of 

the unlikelihood that the other two 

services used by Dr. Ordover, 

Musicovery and Sky.fm, would 

significantly impact the calculation. Id. 

at 25–26. 

In converting his price for noninteractive services to a price for Sirius 

XM, Dr. Ordover used the monthly price 

charged to subscribers for the Sirius XM 

Select package. Ordover Third 

Corrected/Amended WDT at 43, SX 

Trial Ex. 74. Dr. Noll suggests that using 

Sirius XM’s Average Revenue Per User 

(‘‘ARPU’’) makes more sense, stating 

that ‘‘I doubt that Dr. Ordover disagrees 

that ARPU, not sticker price, is the 

correct basis for calculating royalties.’’ 

Noll Revised WRT at 20 n.5, SXM Reb. 

Trial Ex. 6. ARPU was $11.22 in the first 

quarter of 2011 and rose to $11.49 in the 

first quarter of 2012 after the Sirius XM 

price increase. I use $11.49 as the most 

current ARPU figure in the record, and 

the one most representative for the 

coming licensing term. 

Making the adjustments for the price 

of non-interactive services and revenues 

for Sirius XM 86 yields a percentage-ofrevenue rate for Sirius XM of 16.2%.87

Dr. Ordover opines that his second 

alternative benchmark generates a lower 

bound estimate of reasonable rates. 

Ordover Third Corrected/Amended 

WDT at 33, SX Trial Ex. 74. However, 

I am not confident that his benchmark 

fully adjusts for interactivity to the level 

of service offered by Sirius XM’s 

satellite radio service. For example, 

Pandora and Last.fm allow more user 

control of content than Sirius XM. Noll 

Revised WRT at 27, SXM Reb. Trial Ex. 

6. Musicovery allows users to create 

playlists within a social network, to ban 

songs and artists from certain 

customized channels, and to skip songs 

altogether, while Sky.fm permits 

caching for later listening. Id. at 28. 

Additionally, Dr. Ordover’s use of the 

average per-subscriber royalty payment 

of $5.95, which is drawn from the 60% 

average royalty fee for interactive 

services, bakes in the interactive service 

mstockstill on DSK4VPTVN1PROD with RULES3

23092 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

88SoundExchange, citing Dr. Ordover’s 

testimony, argues that the policy considerations of 

the first three factors are subsumed in the 

marketplace benchmarks it has proffered. SX PFF 

¶¶ 502–507. Since I do not accept the benchmarks 

of either side as determinative of the rate to which 

Section 801(b) is applied, other than their ability to 

define the range of reasonable rates, 

SoundExchange’s argument is inapposite. 

royalty to his calculation by virtue of its 

use as a multiplier. 

There are other concerns with Dr. 

Ordover’s analysis. For example, Live 

365, which charges the most of the noninteractive services that Dr. Ordover 

observed, offers more than 7,000 

channels that are pre-programmed by 

independent entities and other content 

that does not closely resemble the Sirius 

XM satellite. This reduces my 

confidence that Dr. Ordover’s 16.2% 

benchmark is as reliable as the one the 

Judges considered in SDARS–I. In sum, 

the 16.2% royalty rate marks the upper 

bound of reasonable rates in this 

proceeding, with the lower bound 

marked by the 5%–7% rates from the 

Direct Licenses. The appropriate royalty 

rates lie within this zone, identified by 

my Section 801(b) policy analysis 

described below. 

4. The Section 801(b) Factors 

In SDARS–I, the Judges determined 

that an evaluation of the marketplace 

evidence hued in the direction of Dr. 

Ordover’s interactivity-adjusted 

interactive subscription market analysis 

that marked the upper bound of 

reasonable royalty rates in that 

proceeding. See 73 FR at 4094. For the 

reasons stated above, the market-based 

evidence presented in this proceeding 

does not weigh in favor of either 

SoundExchange’s or Sirius XM’s 

presentations. Rather, reasonable rates 

to be paid by Sirius XM for the 2013– 

2017 licensing period lie along the 

continuum of rates marked at the lower 

end by 5%–7% from Sirius XM’s 

presentation and at the upper end by 

16.2% by SoundExchange’s 

presentation. Consideration of the 

Section 801(b) policy factors locates the 

appropriate royalty rates within that 

range. 

a. Maximize Availability of Creative 

Works 

The first policy objective set forth in 

Section 801(b)(1) is to ‘‘maximize the 

availability of creative works to the 

public.’’ 17 U.S.C. 801(b)(1)(A). Sirius 

XM argues that application of the first 

factor favors adoption of rates at the 

lower end of the range for three 

reasons.88 First, Sirius XM contends that 

its satellite radio service enhances the 

delivery and availability of sound 

recordings by providing nationwide 

transmissions of sound recordings not 

played elsewhere. Second, Sirius XM 

submits that royalties from the Section 

114 SDARS license are too small a 

portion of record companies’ overall 

revenue to be a driving force behind 

decisions to produce creative works. 

Thus, according to Sirius XM, a lower 

royalty rate will not reduce record 

companies’ incentives. Third, Sirius XM 

argues that the promotional effects 

created by its artist-themed channels, 

special benefits and programming exert 

a direct promotional impact on the sale 

of sound recordings thereby generating 

revenue for rightsholders and inducing 

them further to create new sound 

recordings. Sirius XM RFF ¶ 99. 

I am not persuaded that any of these 

reasons augurs in favor of rates at the 

lower end of the range of reasonable 

rates. While it is acknowledged that 

Sirius XM’s signal is capable of 

reception in locations in the United 

States not served by over-the-air 

terrestrial broadcast radio or wireless 

Internet service, Dr. Noll could not 

estimate what percentage of the 

population (approximately 2% in the 

U.S.) in these unserved areas actually 

subscribes to Sirius XM’s satellite radio 

service. Noll Revised Amended WDT at 

18–21, SXM Dir. Trial Ex. 1. Even for 

those persons in unserved areas who do 

subscribe to Sirius XM, there is no 

evidence that this group depends upon 

Sirius XM in order to access music. In 

fact, Sirius XM’s own internal survey 

demonstrates that subscribers who 

deactivate their Sirius XM service 

typically turn to consumption of music 

on CDs. SX Trial Ex. 8 at 23 

(SXM_CRB_DIR_00042796). 

With respect to the percentage of 

record company revenues represented 

by Sirius XM’s Section 114 royalty 

payments, it is true that the percentages 

of the totals are low; nonetheless, there 

is testimony that the royalty payments 

contribute significantly to overall 

profitability. See, 6/13/12 Tr. 2141:1–10 

(Ciongoli)(UMG); Ford Amended/ 

Corrected WRT at 13, SX Trial Ex. 244 

(Warner); PSS Trial Ex. 33 (Sony). 

Therefore, it cannot be said that Section 

114 royalty rates—whether low or high 

within the range—have no impact 

whatsoever on record companies’ 

incentives to create new sound 

recordings. 

Finally, there is no objective, 

quantifiable evidence that Sirius XM’s 

promotional activities with respect to its 

music offerings, events, and 

surrounding programming produce a net 

positive impact on record company 

revenues. While these activities, viewed 

individually, may have promotional 

effect on record sales, there is 

insufficient evidence in the record as to 

the overall effect of Sirius XM’s satellite 

radio service on all streams of record 

company revenues from sound 

recordings. Indeed, Sirius XM’s witness 

Steven Blatter conceded that his 

examples of on-the-air activities showed 

only a correlation between airplay and 

record sales and nothing more. 6/8/12 

Tr. 1032:20–1033:7 (Blatter). It may be 

that Sirius XM’s use of sound recordings 

has an overall substitutional effect upon 

record company revenues, as opposed to 

an overall promotional effect. Sufficient 

and creditable evidence is not present in 

this record to quantify the promotional/ 

substitutional effect of Sirius XM’s 

service. 

In sum, I find that the policy goal of 

maximizing the availability of creative 

works to the public is not, due to the 

paucity of the evidentiary presentations, 

advanced by royalty rates at either the 

upper bound or the lower bound of the 

range of reasonable rates determined 

from my analysis of the marketplace 

evidence. 

b. Afford Fair Return/Fair Income Under 

Existing Market Conditions 

The second policy objective seeks ‘‘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.’’ 17 

U.S.C. 801(b)(1)(B). SoundExchange 

contends that dramatic changes in the 

recorded music business within the last 

decade have placed a greater emphasis 

on digital exploitation of sound 

recordings versus physical sales, 

thereby increasing the importance of 

revenues generated by the Section 114 

license. Sirius XM contends that lower 

royalty rates are necessary to enable it 

to recover the investments in its satellite 

business and achieve profitability. 

Charles Ciongoli, Executive Vice 

President and Chief Financial Officer for 

Universal Music Group North America 

(‘‘UMG’’), testified that the recorded 

music business’ new reliance on digital 

revenues is the result of consumers 

purchasing fewer physical products as 

they gain more widespread access to 

music through digital services. As a 

result, companies like UMG cannot rely 

solely on the sale of physical products 

or permanent downloads, as in years 

past, and must obtain substantial royalty 

revenues from ‘‘access’’ services, such 

as Sirius XM, in order to survive. 

Ciongoli Corrected WDT at 4–6, SX 

Trial Ex. 67. See also Bryan Corrected 

WDT at 3–4, SX Trial Ex. 66; 6/13/12 Tr. 

1969:21–1970:12 (Bryan). 

SoundExchange submits that digital 

royalties are even more important for 

independent record companies to 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23093 

89 Indeed, it is difficult to imagine royalty rates, 

other than perhaps those approaching zero, that 

might make more than a dent in the recovery of 

billions of dollars of cumulative losses. 

ensure a fair return on their efforts to 

develop artists in the short and long 

terms. Van Arman WDT at 3, SX Trial 

Ex. 77. 

Sirius XM states that the costs of its 

investments in the satellite business, 

expenses related to research, 

development, and permitting, and its 

operating losses must be measured 

cumulatively, not as a snapshot of 

annual operating costs, in considering 

fair return to the user under the second 

Section 801(b) factor. Sirius XM PFF 

¶ 263. The evidence, according to Sirius 

XM, demonstrates that it is a long way 

from earning any return on its billions 

of dollars of expenditures, in contrast to 

the record companies which have 

‘‘presented no evidence that the record 

industry is not currently earning a fair 

return on its investments in the 

production of creative works.’’ Id. at 

¶ 264. 

Evaluating royalty rates that would 

enable recovery of expenditures of 

Sirius XM over more than a decade of 

operations is not required under the 

second Section 801(b) factor.89 As the 

Judges observed in SDARS–I, 

‘‘[a]ffording copyright users a fair 

income is not the same thing as 

guaranteeing them a profit in excess of 

the fair expectations of a highly 

leveraged enterprise.’’ SDARS I, 73 FR 

at 4095 (footnote omitted). During the 

current five-year licensing period, Sirius 

XM has publicly reported in its SEC 

filings adjusted Earnings Before Interest, 

Taxes, Depreciation and Amortization 

(‘‘EBITDA’’) of positive $2.1 billion, and 

net income of positive $3.2 billion. 

Frear WDT at 7, SXM Dir. Trial Ex. 12 

(2008–2010 results); Lys WRT at SX Ex. 

231–RP, SX Ex. 232–RP, SX Trial Ex. 40 

(2011 and 2012 first quarter results), SX 

Trial Ex. 240; SX Trial Ex. 217 (2012 

second quarter results and 2012 fullyear guidance). By the end of 2012 

under the current 8% of Gross Revenues 

royalty rate, Sirius XM expects to report 

cumulative adjusted EBITDA of positive 

$2.6 billion, net income of positive $3.4 

billion, and free cash flow of positive $1 

billion. SX Trial Ex. 217. EBITDA 

results are predicted to increase in the 

coming years, whether the royalty rates 

are set beginning at 9% in 2013 and 

rising 1% per year to end at 13% 

(Morgan Stanley’s ‘‘base case’’ scenario), 

or beginning at 12% in 2013 and rising 

by 2% per year to end at 20% (Morgan 

Stanley’s ‘‘bear case’’ scenario). SXM 

Reb. Trial Ex. 12 at 9; SX PFF ¶ 568. In 

sum, I cannot discern how selection of 

any rate within the range of reasonable 

rates suggested by the marketplace 

evidence will fail to enable Sirius XM 

to earn a fair income in the upcoming 

licensing period. 

With respect to fair return to the 

copyright owner, I accept the testimony 

of Mr. Ciongoli and others that revenues 

from the statutory licenses are of greater 

importance to record labels as a result 

of the changes brought about by digital 

distribution of music and that such 

revenues contribute to the overall 

profits. Their importance may be offset 

somewhat by the gains achieved by the 

lower costs associated with digital 

distribution and the efficiencies 

achieved by the record industry in 

recent years through downsizing. At 

best, the record testimony suggests that 

a royalty rate above the existing 8% of 

Gross Revenues will promote a fair 

return to copyright owners in the 

upcoming licensing term, but the 

evidence does not permit quantification 

of an increase with accuracy. 

Nevertheless, I am satisfied that the 

rates set forth below incorporate the 

policy considerations of fair return/fair 

income prescribed in the second Section 

801(b) factor. 

c. Relative Roles of Copyright Owners 

and User 

This policy factor requires that the 

rates adopted reflect the relative roles of 

the copyright owners and copyright user 

in the product made available with 

respect to relative creative contribution, 

technological contribution, capital 

investment, cost, risk, and contribution 

to the opening of markets for creative 

expression and media for their 

communication. 17 U.S.C. 801(b)(1)(C). 

The majority of the evidence and 

arguments submitted by the parties on 

this factor can be generally described by 

a single inquiry: who spent more on 

their business? Compare, SX PFF 

¶¶ 535–544 with Sirius XM PFF ¶¶ 278, 

289–290, 294. Capital investments, costs 

and risk, however, are only part of the 

analysis required by the third Section 

801(b) factor. Relative creative and 

technological contributions, as well as 

contributions to opening new markets 

must also be considered. Sirius XM 

contends that it has pioneered and built 

a complex satellite delivery system that 

assures uninterrupted, nationwide 

availability of programming content, 

thereby creating a satellite radio 

business that did not previously exist. 

Sirius XM PFF ¶¶ 280–286. 

SoundExchange counters that Sirius XM 

has exploited mostly existing 

technology, principally designed and 

built by WorldSpace, Boeing, PanAmSat 

and the United States Army. SX RFF 

¶¶ 252–257. 

As is stated with respect to the PSS, 

supra, the task is not to consider each 

element of the third factor separately 

and make unspecified, unquantified up 

or down adjustments to the chosen 

royalty rates. Rather, the task with 

respect to the SDARS rate is to consider 

the elements as a whole and determine 

whether such consideration warrants 

any directional change in the range of 

rates established by the evaluation of 

the marketplace evidence (i.e., 5%–7% 

on the lower end to 16.2% on the upper 

end). I conclude, upon careful weighing 

of the evidence, that the third Section 

801(b) factor does not require royalty 

rates that hue to either end of the 

spectrum of reasonable rates. In fact, 

little has changed in the evidentiary 

record relevant to this factor since 

SDARS–I. Sirius XM continues to 

overstate the originality of its 

technological contributions, as well as 

its exposure to risk. Elbert Designated 

WRT passim, SX Trial Ex. 410. No new 

markets have been opened during the 

current licensing term, nor is there 

evidence suggesting that the situation 

will change in the upcoming term. As 

was the case in SDARS–I, Sirius XM and 

the record companies continue to invest 

large sums in operating and advancing 

their businesses, as well as developing 

products for the future. The evidence 

does not indicate that the output or 

efforts of either side warrants a higher 

or lower royalty rate. 

d. Minimize Disruptive Impact 

The fourth policy factor under Section 

801(b) requires the Judges to determine 

rates that ‘‘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). The analytical framework 

for my evaluation of this factor is well 

established. A royalty rate may be 

considered disruptive ‘‘if it directly 

produces an adverse impact that is 

substantial, immediate and irreversible 

in the short-run because there is 

insufficient time for [the parties 

impacted by the rate] to adequately 

adapt to the changed circumstances 

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.’’ SDARS– 

I, 74 FR at 4097; see also Phonorecords 

I, 74 FR 4510, 4525 (Jan. 26, 2009). 

In SDARS–I, it was the Judges’ 

consideration of this factor that merited 

the adoption of a rate below the upper 

bound of the zone of reasonable market 

rates suggested by the interactivitymstockstill on DSK4VPTVN1PROD with RULES3

23094 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

90The merger of the two companies did not occur 

until the following year. 6/7/12 Tr. 640:15 (Frear). 

91The record in this proceeding is replete with 

public statements and assertions by the executive 

officers of Sirius XM that the company is and will 

be highly successful and profitable, both in the 

short term and the long term. See, e.g,, Lys 

Corrected WDT at 8, 10–11 (quoting Mr. Karmazin 

from November 2011: ‘‘[W]e believe we have many, 

many years of subscriber growth ahead of us.’’), SX 

Trial Ex. 80; 8/13/12 Tr. 3179:7–10 (Frear)(Sirius 

XM revenue not just growing, but accelerating); Lys 

WRT at 31 & SX 238–RP (Mr. Karmazin in an April 

2012 interview with Forbes magazine: ‘‘[W]e’re a 

very profitable, successful company. If we want a 

performer, we can afford to pay more than anybody 

else because we’re making more.’’), SX Ex. 226–RP 

(Mr. Karmazin: ‘‘Given the predictable nature of our 

business, we would prefer to take advantage of a 

prudent level of leverage, which should mean 

higher returns to our equity holders over time.’’), 

SX Trial Ex. 240. 

92 I find Professor Stowell’s criticisms of equity 

analysts’ forecasts flawed and unpersuasive. He 

ignores substantial, published research as to the 

improved accuracy of projections, particularly 

adjusted Ordover benchmark (i.e., 13%). 

It is, therefore, not surprising that the 

parties have devoted most of their 

argument under Section 801(b) to the 

fourth factor. Much of this argument is 

inapposite here, however, because it is 

made in support of the parties’ 

respective rate proposals. The task here 

is to evaluate rates within the 5%–7% 

to 16.2% zone of reasonableness and 

select a rate or rates, consistent with the 

other Section 801(b) factors, that will 

not cause disruption. This requires 

consideration of the evidence on 

disruption presented in this proceeding, 

not the evidence that was presented or 

evaluated by the Judges in SDARS–I. 

The record in this proceeding 

demonstrates that Sirius XM is in a far 

stronger financial position than it was at 

the time of SDARS–I. At the end of 

2007, Sirius and XM 90 had a total of 

17.3 million subscribers. SX Trial Ex. 16 

at 18 (SXM_CRB_DIR_00021683). By the 

end of 2012, Sirius XM has announced 

that, with a net increase of 1.6 million 

subscribers this year, it will attain 23.5 

million subscribers. SX Trial Ex. 217 at 

7. In 2007, Sirius and XM had combined 

revenue of only $2.1 billion, with 

combined adjusted EBITDA of negative 

$565 million. SX Trial Ex. 16 at p. 14– 

15 (SXM_CRB_DIR_00021680–81). By 

the end of 2012, Sirius XM has 

announced that its revenue will be $3.4 

billion, and its adjusted EBITDA will be 

approximately a positive $900 million. 

SX Trial Ex. 217 at 7. A similar situation 

applies to free cash flow, rising from 

negative $505 million in 2007 to 

approximately positive $700 million in 

2012. SX Trial Ex. 16 at 16 

(SXM_CRB_DIR_00021682); SX Trial 

Ex. 217 at 7; see also Lys Corrected 

WDT at 18–21, SX Trial Ex. 80. In 2007, 

Sirius and XM faced considerable 

expense in the completion of their 

satellite builds, the failure of which, the 

Judges recognized, ‘‘clearly raises the 

potential for disruption of the current 

consumer service.’’ SDARS–I, 73 FR at 

4097. Sirius XM has no plans to launch 

or invest in new satellites during the 

2013–2017 licensing period. Lys WRT at 

SX Ex. 211–RP at 44, SX Trial Ex. 240; 

6/6/12 Tr. 607:18–22 (Meyer). 

Despite its strong financials in 2012, 

Sirius XM’s witnesses attempt to paint 

a grim picture for the upcoming 

licensing term. David Stowell, professor 

of finance at Northwestern University’s 

Kellogg School of Management, testified 

that Sirius XM’s financial history and 

substantial accumulated losses evince a 

threat of disruption caused by higher 

royalty rates that is ‘‘equal to or even 

greater than the one it faced at the time 

of the last rate proceeding.’’ Stowell 

WDT at 21, SXM Dir. Trial Ex. 18. David 

Frear, Sirius XM’s Chief Financial 

Officer, testified that Sirius XM’s brush 

with bankruptcy in late 2008 (where it 

struggled to repay the balance due on 

notes that matured on February 17, 

2009, until receiving a loan from Liberty 

Media) requires that Sirius XM maintain 

a cash reserve of at least $750 million 

to guard against future calamity. Frear 

WDT at 4–5, SXM Dir. Trial Ex. 12; 6/ 

7/12 Tr. 663:17–665:2 (Frear). Mr. Frear 

and Mel Karmazin, the Chief Executive 

Officer of Sirius XM, testified that the 

satellite delivery infrastructure of Sirius 

XM radio is inherently risky and that 

any number of events could seriously 

impact its ability to deliver 

programming and result in large, 

unanticipated expense. Frear WDT at 9, 

SXM Dir. Trial Ex. 12; Karmazin WDT 

at 17, SXM Dir. Trial Ex. 19. James 

Meyer, Sirius XM’s President of 

Operations and Sales, testified that 

current economic uncertainty can affect 

the purchase of Sirius XM in 

automobiles and increase the number of 

current subscribers discontinuing 

service (described as the ‘‘churn rate’’). 

6/6/12 Tr. 566:21–568:16 (Meyer); 

Meyer WDT at 18–19, 29–30, SXM Dir. 

Trial Ex. 5. And William Rosenblatt, 

president of GiantSteps Media 

Technology Strategies, along with 

Messrs. Meyer, Karmazin, Frear and 

Professor Stowell, testified that rapidly 

evolving Internet-based competitors, 

advantaged by rapidly expanding 

wireless broadband capabilities and the 

explosion of smartphone use, present a 

potentially great disruptive challenge to 

Sirius XM during the 2013–2017 

licensing period. Rosenblatt Corrected 

WDT passim, SXM Dir. Trial Ex. 17; 

Meyer WDT at 7–18, SXM Dir. Trial Ex. 

5; Stowell WDT at 10–11, 22, SXM Dir. 

Trial Ex.18; 6/11/12 Tr. 1429:6–13 

(Karmazin); 8/13/12 Tr. 3042:5–3043:9 

(Frear). 

The problem with Sirius XM’s parade 

of horribles is that—with one 

exception—it is belied by the evidence 

and, in most instances, by Sirius XM’s 

own public statements. Dr. Thomas Lys, 

SoundExchange’s expert economist, 

presented data projecting Sirius XM’s 

likely future EBITDA and free cash flow 

(two financial measures that the Judges 

focused on in considering the 

disruption factor in SDARS–I) using 

forecasts from Morgan Stanley and 

Sirius XM’s own internal projections. 

Morgan Stanley projects significant 

positive EBITDA and free cash flow for 

Sirius XM in the upcoming license 

period under varying scenarios with 

different royalty rates and economic 

conditions. Lys WRT at 21–31, SX Trial 

Ex. 240. Particularly relevant to the 

consideration of reasonable rates is 

Morgan Stanley’s recent 2012 baseline 

projection which assumes that royalty 

rates will begin at 9% in 2013 and rise 

1% per year to end at 13%. SXM Reb. 

Trial Ex. 12 at 9. Under this projection, 

Sirius XM’s EBITDA will increase each 

year despite the increases in rates and 

will be higher than Sirius XM has 

achieved in the history of its company. 

Id. Furthermore, projections made using 

Sirius XM’s own internal forecasts 

generally corroborate these results. Lys 

WRT at 11, SX Trial Ex. 240. 

Sirius XM vehemently opposes 

consideration of either the Morgan 

Stanley or its own internal projections, 

arguing that long-term financial 

projections for Sirius XM are not 

reliable. Sirius XM RFF ¶¶ 118–129. It is 

certainly true that the longer the term of 

forecast, the lesser the degree of 

accuracy that can be expected in the 

latter portion of the term. However, 

Sirius XM does not and cannot contend 

that short-term projections, either its 

own or those of Morgan Stanley, are 

highly unreliable.91 Both show 

substantial EBITDA profitability and 

positive free cash flow, even under 

scenarios that exceed the range of 

reasonable rates I have identified in this 

proceeding. See Lys Corrected WDT at 

25–28, SX Trial Ex. 80. A royalty rate 

can be disruptive under the fourth 

Section 801(b) factor if it ‘‘produces an 

adverse impact that is substantial, 

immediate and irreversible in the shortrun.’’ SDARS–I, 73 FR at 4097. The 

Morgan Stanley and Sirius XM internal 

projections convincingly reveal that 

disruption to Sirius XM will not occur 

in the short run by royalty rates within 

the range of reasonable rates identified 

in this proceeding.92

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23095 

within recent years, as well as changes 

implemented by the Securities and Exchange 

Commission to eliminate analyst bias. Lys WRT at 

11–12, SX Trial Ex. 240. He also ignores recent data 

criticizing the performance of equity analysts that 

follow Sirius XM, confining his analysis to only 

forecasts made prior to the Sirius and XM merger. 

Id. at 14. 

93 Indeed, Sirius XM originally considered calling 

the fee the ‘‘Copyright Royalty Board Fee’’ instead 

of the Music Royalty Fee. Lys WRT at 33 n.142, SX 

Trial Ex. 240. 

94SoundExchange and Sirius XM disagree as to 

what percentage of licensing costs are passed 

through to subscribers in the Music Royalty Fee. 

SoundExchange contends 100%, Lys WRT at 32 & 

SX Ex. 240–RR, SX Trial Ex. 240, while Sirius XM 

contends 53%. Frear Revised WRT at 16, SXM Reb. 

Trial Ex. 1. A substantial portion of licensing fees 

is passed on to subscribers in either case, 

ameliorating the possibility of short-term negative 

effects of increased Section 114 fees. 

95The odds of another such crisis occurring 

during the 2013–2017 licensing period are low 

since that type of crisis has happened only twice 

in the past 80 years. 8/20/12 Tr. 4046:5–9 (Lys). 

There is also another element of 

Sirius XM’s business operation that 

persuades me that rates within the 

reasonable range I have identified in 

this proceeding will not be disruptive: 

the Music Royalty Fee. The U.S. Music 

Royalty Fee was adopted by Sirius XM 

in July 2009, with the permission of the 

Federal Communications Commission, 

as a result of the Sirius and XM merger 

and in response to the royalty rates 

adopted in SDARS–I,93 to pass through 

to subscribers Sirius XM’s music royalty 

costs. After adopting the $1.98 per 

subscriber per month charge (it is 

currently $1.42), Mr. Karmazin 

informed investors that there was no 

‘‘discernable impact on churn,’’ 

meaning that the overall price increase 

to subscribers did not impact Sirius 

XM’s ability to retain its subscribers. 

Lys WRT at 33–34, SX Trial Ex. 240. 

Sirius XM’s long-range planning 

documents reveal an intention for future 

use of the Music Royalty Fee to recoup 

music licensing expenses, SX Trial Ex. 

9 at 6 (SXM_CRB_DIR_00031738), and 

neither Messrs. Karmazin nor Frear 

denied that the Music Royalty Fee will 

continue to appear on customers’ bills 

in some amount in the upcoming 2013– 

2017 licensing period. Sirius XM’s 

demonstrated ability to pass through 

music licensing costs to its subscribers 

without discernible, negative impact to 

its satellite radio business further belies 

its claims that increased royalty fees 

from current levels will be disruptive.94

Sirius XM also posits several financial 

risks for the upcoming license period 

that it claims will be exacerbated by 

higher royalty rates. First, Sirius XM 

contends that higher royalty rates will 

reduce available levels of free cash flow 

to such an extent as to impair Sirius 

XM’s ability to account for possible 

downturns in any of its key performance 

metrics such as churn, conversion from 

trial to paid subscriptions, and average 

revenue per user over the upcoming rate 

term. Sirius XM RFF ¶ 117. Unlike 

consideration of the Sirius XM or 

Morgan Stanley forecasts, which have 

reasonable reliability at least in the 

short term, Sirius XM’s suggestions of 

possible downturns in its satellite radio 

business are no more than that. While 

downturns are possible, Sirius XM has 

not presented compelling testimony that 

any one or more events are probable 

and, therefore, must be considered 

closely. 

Second, Sirius XM contends that its 

‘‘brush with bankruptcy’’ in the 

aftermath of the July 2008 merger 

demonstrates the risk of its debt level 

and difficulty in accessing credit 

markets, all of which will be made 

worse by higher royalty rates. Sirius XM 

PFF ¶¶ 313–314. The ‘‘brush with 

bankruptcy’’ argument, however, is a 

red herring, as it was caused by the need 

to refinance during a global-wide credit 

crisis and had nothing to do with the 

Section 114 royalty rates. 8/20/12 Tr. 

4040:14–4042:7 (Lys).95 Professor 

Stowell’s conclusion that Sirius XM has 

a ‘‘realistic possibility’’ of defaulting on 

its outstanding debt in the near future 

is speculative and not based upon the 

possibility of higher Section 114 royalty 

rates, since the ratings agencies do not 

discuss such royalties as a primary risk 

of Sirius XM in assessing its credit 

quality and likelihood of default. Lys 

WRT at 23, SX Trial Ex. 240; 8/20/12 Tr. 

4049:2–4050:13 (Lys). Moreover, credit 

rating agencies have repeatedly raised 

Sirius XM’s credit rating over the last 

few years and believe that it has strong 

liquidity and ability to finance its debt. 

Lys Corrected WDT at 31–32, SX Trial 

Ex. 80; Lys WRT at 47–48, SX Trial Ex. 

240. 

Third, Sirius XM argues that higher 

royalty rates will disrupt its ability to 

recoup billions of dollars of 

accumulated losses. Sirius XM PFF 

¶ 312; see also Frear WDT at 7, SXM 

Dir. Trial Ex. 12 (discussing decrease in 

Sirius and XM stock prices from 2000 to 

2007). Past losses and decreases in stock 

prices, however, do not have relevance 

to a disruption analysis under Section 

801(b). There is no evidence that the 

expenditures of prior investors will 

have any impact on the future decision 

making or operation of the company. 

See, e.g., 6/8/12 Tr. 1297:1–8 (Stowell) 

(Professor Stowell acknowledging that 

he did not know if any pre-2008 

investors are still owners of Sirius XM 

stock today). 

In sum, there is no persuasive 

evidence that an increase in royalty 

rates from the current level and within 

the range of reasonable rates identified 

by the analysis of market evidence will 

cause disruption to the operation of 

Sirius XM’s satellite radio business in 

the beginning to middle of the 2013– 

2017 licensing period. There is, 

however, testimony that raises the 

potential for disruption in the latter 

portion of the licensing term. New 

Internet-based competitors, whose 

emergence is enabled by the explosion 

of wireless broadband capability and 

smartphone use, appear poised to offer 

the same advantages over terrestrial 

radio that Sirius XM once claimed only 

to itself, and without the expenses 

associated with a satellite-based 

delivery system. Meyer WDT at 5–11, 

SXM Direct Trial Ex. 5; Rosenblatt 

Corrected WDT at 12–14, 20–38, SXM 

Dir. Trial Ex. 17. Such competitors can 

also offer their customers the added 

benefits of increased customization and 

personalization which Sirius XM is 

incapable of providing on its satellite 

radio service. Meyer WDT at 8–9, SXM 

Dir. Trial Ex. 5; Rosenblatt Corrected 

WDT at 20–31, SXM Dir. Trial Ex. 17. 

Many of these competitive products are 

being introduced already, particularly in 

automobiles which lie at the core of 

Sirius XM’s satellite radio business, and 

could cause disruption by 2016 or 2017. 

See Meyer WDT at 15 (all major car 

manufacturers expected to incorporate 

connected-car technology within the 

next three years), SXM Dir. Trial Ex. 5. 

SoundExchange counters that Sirius XM 

enjoys considerable advantages over 

Internet radio competitors, such as a 

head start in integration of satellite 

radios into the automobile dashboard, 

current agreements with auto 

manufacturers, and current limitations 

on network streaming technology. SX 

PFF ¶¶ 637, 639–640, 642, 645–648. 

Nevertheless, SoundExchange does 

acknowledge that Internet-based 

competitors will grow, along with Sirius 

XM, in the coming rate term. Id. ¶ 650. 

The evidence suggests that 

competition from Internet-based radio, 

particularly in the automobile, may 

cause disruption to Sirius XM’s 

business by the final two years of the 

upcoming licensing period. The 

potential for such disruption is 

underscored by the limitations afforded 

to long-term financial projections (four 

and five years from now), and the 

relative speed in technological 

development demonstrated in the 

marketplace in recent years for delivery 

of music. I cannot forecast with 

certainty the degree to which future 

mstockstill on DSK4VPTVN1PROD with RULES3

23096 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

Internet-based competition may cause 

disruption in Sirius XM’s business and, 

therefore, cannot determine the amount 

to which royalty rates may or should be 

reduced to prevent such disruption. 

However, the potential for disruption is 

suggested sufficiently by the evidence 

and counsels against escalation of the 

royalty rates in the last two years of the 

2013–2017 license period. 

5. Conclusions Regarding Section 114 

Rates 

As discussed above, analysis of the 

market-based evidence presented in this 

case yields a range of reasonable royalty 

rates between 5%–7% on the lower end, 

and 16.2% on the upper end. I have 

analyzed and applied the Section 801(b) 

factors to this range of reasonable rates 

and conclude that only two of the 

factors—the second and the fourth— 

impact the selection of rates within the 

range for the upcoming 2013–2017 

licensing term. The second factor (fair 

return/fair income under existing 

market conditions) suggests selection of 

royalty rates that are above the current 

8% rate, albeit without specific 

quantification. The fourth factor 

(minimizing any disruptive impact on 

the structure of the industries involved 

and on generally prevailing industry 

practices) counsels against raising the 

royalty rates further in the final two 

years of the licensing term. I dissent 

from the rates adopted by the majority 

and submit that they should be as 

follows: for 2013: 10.0%; for 2014: 

11.0%; for 2015: 12.0%; 2016: 12.0%; 

and for 2017: 12.0%. 

Dated: February 14, 2013. 

William J. Roberts, Jr., 

Copyright Royalty Judge. 

List of Subjects in 37 CFR Part 382 

Copyright, Digital audio 

transmissions, Performance right, Sound 

recordings. 

Final Regulations 

For the reasons set forth in the 

preamble, the Copyright Royalty Judges 

amend 37 CFR part 382 as follows: 

PART 382—RATES AND TERMS FOR 

DIGITAL TRANSMISSIONS OF SOUND 

RECORDINGS AND THE 

REPRODUCTION OF EPHEMERAL 

RECORDINGS BY PREEXISTING 

SUBSCRIPTION SERVICES AND 

PREEXISTING SATELLITE DIGITAL 

AUDIO RADIO SERVICES 

■ 1. The authority citation for part 382 

continues to read as follows: 

Authority: 17 U.S.C. 112(e), 114 and 

801(b)(1). 

§ 382.1 [Amended] 

■ 2. Section 382.1 is amended as 

follows: 

■ a. In paragraph (a), by removing 

‘‘114(d)(2)’’ and adding ‘‘114’’ in its 

place, and by removing ‘‘ephemeral 

phonorecords’’ and adding ‘‘Ephemeral 

Recordings’’ in it place; 

■ b. In paragraph (c), by removing 

‘‘ephemeral phonorecords’’ and adding 

‘‘Ephemeral Recordings’’ in its place; 

and 

■ c. By removing paragraph (d). 

§§ 382.2 through 382.7 [Redesignated as 

§§ 382.3 through 382.8] 

■ 3. Redesignate §§ 382.2 through 382.7 

as §§ 382.3 through 382.8, respectively, 

and add new § 382.2 to read as follows: 

§ 382.2 Definitions. 

For purposes of this subpart, the 

following definitions shall apply: 

Collective is the collection and 

distribution organization that is 

designated by the Copyright Royalty 

Judges. For the 2013–2017 license term, 

the Collective is SoundExchange, Inc. 

Copyright Owners are sound 

recording copyright owners who are 

entitled to royalty payments made 

under this subpart pursuant to the 

statutory licenses under 17 U.S.C. 112(e) 

and 114. 

Ephemeral Recording is a 

phonorecord created for the purpose of 

facilitating a transmission of a public 

performance of a sound recording under 

a statutory license in accordance with 

17 U.S.C. 114 and subject to the 

limitations specified in 17 U.S.C. 112(e). 

GAAP shall mean generally accepted 

accounting principles in effect from 

time to time in the United States. 

Gross Revenues. (1) Gross Revenues 

shall mean all monies derived from the 

operation of the programming service of 

the Licensee and shall be comprised of 

the following: 

(i) Monies received by Licensee from 

Licensee’s carriers and directly from 

residential U.S. subscribers for 

Licensee’s programming service; 

(ii) Licensee’s advertising revenues (as 

billed), or other monies received from 

sponsors, if any, less advertising agency 

commissions not to exceed 15% of those 

fees incurred to a recognized advertising 

agency not owned or controlled by 

Licensee; 

(iii) Monies received for the provision 

of time on the programming service to 

any third party; 

(iv) Monies received from the sale of 

time to providers of paid programming 

such as infomercials; 

(v) Where merchandise, service, or 

anything of value is received by 

Licensee in lieu of cash consideration 

for the use of Licensee’s programming 

service, the fair market value thereof or 

Licensee’s prevailing published rate, 

whichever is less; 

(vi) Monies or other consideration 

received by Licensee from Licensee’s 

carriers, but not including monies 

received by Licensee’s carriers from 

others and not accounted for by 

Licensee’s carriers to Licensee, for the 

provision of hardware by anyone and 

used in connection with the 

programming service; 

(vii) Monies or other consideration 

received for any references to or 

inclusion of any product or service on 

the programming service; and 

(viii) Bad debts recovered regarding 

paragraphs (1)(i) through (vii) of this 

definition. 

(2) Gross Revenues shall include such 

payments as set forth in paragraphs 

(1)(i) through (viii) of this definition to 

which Licensee is entitled but which are 

paid to a parent, subsidiary, division, or 

affiliate of Licensee, in lieu of payment 

to Licensee but not including payments 

to Licensee’s carriers for the 

programming service. Licensee shall be 

allowed a deduction from ‘‘Gross 

Revenues’’ as defined in paragraph (1) 

of this definition for affiliate revenue 

returned during the reporting period 

and for bad debts actually written off 

during reporting period. 

Licensee means any preexisting 

subscription service as defined in 17 

U.S.C. 114(j)(11). 

Performers means the independent 

administrators identified in 17 U.S.C. 

114(g)(2)(B) and (C), and the parties 

identified in 17 U.S.C. 114(g)(2)(D). 

Qualified Auditor is a Certified Public 

Accountant. 

■ 4. Revise newly redesignated § 382.3 

to read as follows: 

§ 382.3 Royalty fees for the digital 

performance of sound recordings and the 

making of ephemeral recordings by 

preexisting subscription services. 

(a) Commencing January 1, 2013, and 

continuing through December 31, 2017, 

the monthly royalty fee to be paid by a 

Licensee for the public performance of 

sound recordings pursuant to 17 U.S.C. 

114 and the making of any number of 

Ephemeral Recordings to facilitate such 

performances pursuant to 17 U.S.C. 

112(e) shall be a percentage of monthly 

Gross Revenues resulting from 

residential services in the United States 

as follows: for 2013, 8%; and for 2014 

through 2017, 8.5%. 

(b) Each Licensee making digital 

performances of sound recordings 

pursuant to 17 U.S.C. 114 and 

Ephemeral Recordings pursuant to 17 

U.S.C. 112(e) shall make an advance 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23097 

payment to the Collective of $100,000 

per year, payable no later than January 

20th of each year. The annual advance 

payment shall be nonrefundable, but it 

may be counted as an advance of the 

section 112 royalties due and payable 

for a given year or any month therein 

under paragraph (a) of this section; 

Provided, however, that any unused 

portion of an annual advance payment 

for a given year shall not carry over into 

a subsequent year. 

(c) The royalty payable under 17 

U.S.C. 112(e) for the making of 

phonorecords used by the Licensee 

solely to facilitate transmissions for 

which it pays royalties as and when 

provided in this subpart shall be 

included within, and constitute 5% of, 

the total royalties payable under 17 

U.S.C. 112(e) and 114. 

(d) A Licensee shall pay a late fee of 

1.5% per month, or the highest lawful 

rate, whichever is lower, for each 

payment or statement of account, or 

either of them, received by the 

Collective after the due date. Late fees 

shall accrue from the due date until 

payment and the statement of account 

are received. 

■ 5. Revise newly redesignated § 382.4 

to read as follows: 

§ 382.4 Terms for making payment of 

royalty fees and statements of account. 

(a) Payment to the Collective. A 

Licensee shall make the royalty 

payments due under § 382.3 to the 

Collective. 

(b) Timing of payment. A Licensee 

shall make any payments due under 

§ 382.3 on a monthly basis on or before 

the 45th day after the end of each month 

for that month. 

(c) Statements of Account. Licensees 

shall submit monthly statements of 

account on a form provided by the 

Collective. A statement of account shall 

contain the following information: 

(1) Such information as is necessary 

to calculate the accompanying royalty 

payments; 

(2) The name, address, business title, 

telephone number, facsimile (if any), 

electronic mail address and other 

contact information of the person to be 

contacted for information or questions 

concerning the content of the statement 

of account; 

(3) The signature of a duly authorized 

officer or representative of the Licensee; 

(4) The printed or typewritten name 

of the person signing the statement of 

account; 

(5) The date of signature; 

(6) The title or official position held 

in relation to the Licensee by the person 

signing the statement of account; 

(7) A certification of the capacity of 

the person signing; and 

(8) A statement to the following effect: 

I, the undersigned officer or 

representative of the Licensee, have 

examined this statement of account and 

hereby state that it is true, accurate, and 

complete to my knowledge after 

reasonable due diligence. 

(d) Distribution of royalties. (1) The 

Collective shall promptly distribute 

royalties received from Licensees to 

Copyright Owners and Performers, or 

their designated agents, that are entitled 

to such royalties. The Collective shall be 

responsible only for making 

distributions to those Copyright 

Owners, Performers, or their designated 

agents who provide the Collective with 

such information as is necessary to 

identify the correct recipient. The 

Collective shall distribute royalties on a 

basis that values all performances by a 

Licensee equally based upon the 

information provided under the reports 

of use requirements for Licensees 

contained in § 370.3 of this chapter. 

(2) If the Collective is unable to locate 

a Copyright Owner or Performer entitled 

to a distribution of royalties under 

paragraph (d)(1) of this section within 3 

years from the date of payment by a 

Licensee, such royalties shall be 

handled in accordance with § 382.8. 

(e) Retention of records. Both 

Licensees and the Collective shall 

maintain books and records relating to 

the payment of the license fees in 

accordance with generally accepted 

accounting principles for a period of 

three years after the end of the period 

for which the payment is made. These 

records shall include, but are not 

limited to, the statements of account, 

records documenting an interested 

party’s share of the royalty fees, and the 

records pertaining to the administration 

of the collection process and the further 

distribution of the royalty fees to those 

interested parties entitled to receive 

such fees. 

■ 6. Newly redesignated § 382.5 is 

amended as follows: 

■ a. By revising the section heading; 

■ b. In paragraph (a), by removing 

‘‘which has been’’ and by removing 

‘‘§§ 382.5 and 382.6’’ and adding 

‘‘§§ 382.6 and 382.7’’ in its place; 

■ c. By removing paragraphs (b), (c), and 

(f); 

■ d. By redesignating paragraphs (d) and 

(e) as paragraphs (b) and (c), 

respectively; 

■ e. In the introductory text of newly 

redesignated paragraph (b), by adding 

‘‘subject to an appropriate 

confidentiality agreement and’’ after 

‘‘be’’; 

■ f. By revising newly redesignated 

paragraphs (b)(1) and (b)(3); 

■ g. In newly redesignated paragraph 

(b)(2), by removing ‘‘qualified auditor’’ 

and adding ‘‘Qualified Auditor’’ in its 

place, by removing ‘‘copyright owner or 

performing artist’’ and adding 

‘‘Copyright Owner or Performer’’ in its 

place, by removing ‘‘copyright owners’’ 

and adding ‘‘Copyright Owners’’ in its 

place, and by removing ‘‘payments.’’ 

and adding ‘‘payments; and’’ in its 

place; and 

■ h. In newly redesignated paragraph 

(c), by removing ‘‘(d)’’ and adding ‘‘(b)’’ 

in its place. 

The revisions read as follows: 

§ 382.5 Confidential information. 

* * * * * 

(b) * * * 

(1) Those employees, agents, 

consultants and independent 

contractors of the Collective who are 

engaged in the collection and 

distribution of royalty payments 

hereunder and activities directly related 

hereto, who are not also employees or 

officers of a sound recording Copyright 

Owner or Performer, and who, for the 

purpose of performing such duties 

during the ordinary course of 

employment, require access to the 

records; and 

* * * * * 

(3) Copyright Owners and Performers 

whose works have been used under the 

statutory licenses set forth in 17 U.S.C. 

112(e) and 114 by the Licensee whose 

Confidential Information is being 

supplied, or agents thereof provided 

that the only confidential information 

that may be shared pursuant to this 

paragraph (b)(3) are the monthly 

statements of account that accompany 

royalty payments. 

* * * * * 

■ 7. Newly Redesignated § 382.6 is 

amended as follows: 

■ a. In paragraph (c), by removing 

‘‘with’’ and adding ‘‘to’’ in its place, by 

removing ‘‘parties’ ’’ and adding 

‘‘party’s’’ in its place, by removing 

‘‘served’’ and adding ‘‘delivered’’ in its 

place, and by removing ‘‘on the party’’ 

and adding ‘‘to the party’’ in its place; 

■ b. In paragraph (d), by adding ‘‘from 

the date of completion of the 

verification process’’ after ‘‘years’’; 

■ c. In paragraph (e), by removing 

‘‘auditor’’ and adding ‘‘and Qualified 

Auditor’’ in its place; 

■ d. By revising paragraph (f); and 

■ e. In paragraph (g), by removing 

‘‘copyright owners’’ and adding 

‘‘Copyright Owners’’ in its place. 

The revision reads as follows: 

§ 382.6 Verification of statements of 

account. 

* * * * * 

mstockstill on DSK4VPTVN1PROD with RULES3

23098 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

(f) Costs of the verification procedure. 

The interested party or parties 

requesting the verification procedure 

shall pay all costs of the verification 

procedure, unless an independent and 

Qualified Auditor concludes that during 

the period audited, the Licensee 

underpaid royalties by an amount of 

five (5) percent or more; in which case, 

the service that made the underpayment 

shall bear the costs of the verification 

procedure. 

* * * * * 

■ 8. Newly redesignated § 382.7 is 

amended as follows: 

■ a. In paragraph (c), by removing 

‘‘with’’ and adding ‘‘to’’ in its place, by 

removing ‘‘parties’ ’’ and adding 

‘‘party’s’’ in its place, by removing 

‘‘interest’’ and adding ‘‘intent’’ in its 

place, by removing ‘‘served’’ and adding 

‘‘delivered’’ in its place, and by 

removing ‘‘on the party’’ and adding ‘‘to 

the party’’ in its place; 

■ b. In paragraph (d), by adding ‘‘after 

completion of the verification process’’ 

after ‘‘years’’; and 

■ c. In paragraph (e), by removing 

‘‘auditor’’ and adding ‘‘and Qualified 

Auditor’’ in its place; and 

■ d. By revising paragraph (f). 

The revision reads as follows: 

§ 382.7 Verification of royalty payments. 

* * * * * 

(f) Costs of the verification procedure. 

The interested party or parties 

requesting the verification procedure 

shall pay for all costs associated with 

the verification procedure, unless an 

independent and Qualified Auditor 

concludes that, during the period 

audited, the Licensee underpaid 

royalties in the amount of five (5) 

percent or more, in which case, the 

entity that made the underpayment 

shall bear the costs of the verification 

procedure. 

* * * * * 

■ 9. Newly redesignated § 382.8 is 

amended as follows: 

■ a. By revising the section heading; 

■ b. By removing ‘‘copyright owner or 

performer’’ and adding ‘‘Copyright 

Owner or Performer’’ in its place; 

■ c. By removing ‘‘date of distribution’’ 

and adding ‘‘date of the last distribution 

from the royalty fund at issue’’ in its 

place; and 

■ d. By removing ‘‘this period’’ and 

adding ‘‘the three-year claim period’’ in 

its place. 

The revision reads as follows: 

§ 382.8 Unclaimed funds. 

* * * * * 

§ 382.10 [Amended] 

■ 10. Section 382.10 is amended as 

follows: 

■ a. In paragraph (a), by removing 

‘‘2007’’ and adding ‘‘2013’’ in its place 

and by removing ‘‘2012’’ and adding 

‘‘2017’’ in its place; 

■ b. In paragraph (b), by removing 

‘‘112’’ and adding ‘‘112(e)’’ in its place; 

and 

■ c. In paragraph (c), by adding 

‘‘voluntary’’ before ‘‘license 

agreements’’. 

■ 11. Section 382.11 is amended as 

follows: 

■ a. In the definition of ‘‘Collective’’, by 

removing ‘‘2007–2012’’ and adding 

‘‘2013–2017’’ in its place and by 

removing ‘‘period’’ and adding ‘‘term’’ 

in its place; 

■ b. In the definition of ‘‘Copyright 

Owners’’, by removing ‘‘114(f)’’ and 

adding ‘‘114’’ in its place; 

■ c. By adding in alphabetical order a 

definition for ‘‘Directly-Licensed 

Recording’’; 

■ d. In the definition of ‘‘Ephemeral 

Recording’’, by removing ‘‘114(f)’’ and 

adding ‘‘114’’ in its place; 

■ e. In paragraph (1)(i) of the definition 

of ‘‘Gross Revenues’’, by removing 

‘‘residential’’; 

■ f. In paragraph (3)(vi)(D) of the 

definition of ‘‘Gross Revenues’’, by 

removing ‘‘ephemeral recordings’’ and 

adding ‘‘Ephemeral Recordings’’ in its 

place. 

■ g. By adding in alphabetical order a 

definition for ‘‘Pre-1972Recording’’; 

■ h. By removing the definition for 

‘‘Residential’’; and 

■ i. In the definition of ‘‘Term’’, by 

removing ‘‘2007’’ and adding ‘‘2013’’ in 

its place and by removing ‘‘2012’’ and 

adding ‘‘2017’’ in its place. 

The additions read as follows: 

§ 382.11 Definitions. 

* * * * * 

Directly-Licensed Recording is a 

sound recording for which the Licensee 

has previously obtained a license of all 

relevant rights from the Copyright 

Owner of such sound recording. 

* * * * * 

Pre-1972 Recording is a sound 

recording fixed before February 15, 

1972. 

* * * * * 

■ 12. Section 382.12 is revised to read 

as follows: 

§ 382.12 Royalty fees for the public 

performance of sound recordings and the 

making of ephemeral recordings. 

(a) In general. The monthly royalty fee 

to be paid by a Licensee for the public 

performance of sound recordings 

pursuant to 17 U.S.C. 114(d)(2) and the 

making of any number of Ephemeral 

Recordings to facilitate such 

performances pursuant to 17 U.S.C. 

112(e) shall be a percentage of monthly 

Gross Revenues as follows: for 2013, 

9.0%; for 2014, 9.5%; for 2015, 10.0%; 

for 2016, 10.5%; and for 2017, 11.0%, 

except that the royalty fee so 

determined may be reduced by the 

Direct License Share or the Pre-1972 

Recording Share as described in 

paragraphs (d) and (e), respectively, of 

this section. 

(b) Ephemeral recordings. The royalty 

payable under 17 U.S.C. 112(e) for the 

making of phonorecords used by the 

Licensee solely to facilitate 

transmissions for which it pays royalties 

as and when provided in this subpart 

shall be included within, and constitute 

5% of, the total royalties payable under 

17 U.S.C. 112(e) and 114. 

(c) Ephemeral recordings minimum 

fee. Each Licensee making Ephemeral 

Recordings pursuant to 17 U.S.C. 112(e) 

shall make an advance payment to the 

Collective of $100,000 per year, payable 

no later than January 20th of each year. 

The annual advance payment shall be 

nonrefundable, but it shall be 

considered as an advance of the 

Ephemeral Recordings royalties due and 

payable for a given year or any month 

therein under paragraphs (a) and (b) of 

this section; Provided, however, that 

any unused annual advance payment for 

a given year shall not carry over into a 

subsequent year. 

(d) Direct license share. The 

percentage of monthly Gross Revenues 

royalty fee specified in paragraph (a) of 

this section may be reduced by a 

percentage as set forth in this paragraph 

(referred to herein as the ‘‘Direct License 

Share’’). 

(1) Subject to paragraph (d)(3) of this 

section, for each month, the Direct 

License Share is the result of dividing 

the Internet Performances of DirectlyLicensed Recordings on the Reference 

Channels by the total number of Internet 

Performances of all sound recordings on 

the Reference Channels. 

(2) For purposes of paragraph (d)(1) of 

this section: 

(i) A ‘‘Performance’’ is each instance 

in which any portion of a sound 

recording is publicly performed to a 

listener within the United States by 

means of a digital audio transmission or 

retransmission (e.g., the delivery of any 

portion of a single track from a compact 

disc to one listener) but excluding an 

incidental performance that both: 

(A) Makes no more than incidental 

use of sound recordings including, but 

not limited to, brief musical transitions 

in and out of commercials or program 

segments, brief performances during 

news, talk and sports programming, 

brief background performances during 

disk jockey announcements, brief 

mstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 23099 

performances during commercials of 

sixty seconds or less in duration, or 

brief performances during sporting or 

other public events; and 

(B) Other than ambient music that is 

background at a public event, does not 

contain an entire sound recording and 

does not feature a particular sound 

recording of more than thirty seconds 

(as in the case of a sound recording used 

as a theme song). 

(ii) The ‘‘Reference Channels’’ are 

Internet webcast channels offered by the 

Licensee that directly correspond to 

channels offered on the Licensee’s 

SDARS that are capable of being 

received on all models of Sirius radio, 

all models of XM radio, or either or 

both, and on which the programming 

consists primarily of music. 

(3) A Direct License Share adjustment 

as described in paragraph (d) of this 

section is available to a Licensee only 

if— 

(i) The Reference Channels constitute 

a large majority of the music channels 

offered on the Licensee’s SDARS and 

are generally representative of the music 

channels offered on the Licensee’s 

SDARS; and 

(ii) The Licensee timely provides the 

relevant information required by 

§ 382.13(h). 

(4) No performance shall be credited 

as an Internet Performance of a DirectlyLicensed Sound Recording under this 

section if that performance is separately 

credited as an Internet Performance of a 

Pre-1972 sound recording under 

paragraph (e)(1) of this section. 

(e) Pre-1972 Recording Share. The 

percentage of monthly Gross Revenues 

royalty fee specified in paragraph (a) of 

this section may be reduced by a 

percentage as set forth in this paragraph 

(referred to herein as the ‘‘Pre-1972 

Recording Share’’). 

(1) Subject to paragraph (e)(3) of this 

section, for each month, the Pre-1972 

Recording Share is the result of dividing 

the Internet Performances of Pre-1972 

Sound Recordings on the Reference 

Channels by the total number of Internet 

Performances of all sound recordings on 

the Reference Channels. 

(2) For purposes of paragraph (e)(1) of 

this section: 

(i) A ‘‘Performance’’ is each instance 

in which any portion of a sound 

recording is publicly performed to a 

listener within the United States by 

means of a digital audio transmission or 

retransmission (e.g., the delivery of any 

portion of a single track from a compact 

disc to one listener) but excluding an 

incidental performance that both: 

(A) Makes no more than incidental 

use of sound recordings including, but 

not limited to, brief musical transitions 

in and out of commercials or program 

segments, brief performances during 

news, talk and sports programming, 

brief background performances during 

disk jockey announcements, brief 

performances during commercials of 

sixty seconds or less in duration, or 

brief performances during sporting or 

other public events; and 

(B) Other than ambient music that is 

background at a public event, does not 

contain an entire sound recording and 

does not feature a particular sound 

recording of more than thirty seconds 

(as in the case of a sound recording used 

as a theme song). 

(ii) The ‘‘Reference Channels’’ are 

Internet webcast channels offered by the 

Licensee that directly correspond to 

channels offered on the Licensee’s 

SDARS that are capable of being 

received on all models of Sirius radio, 

all models of XM radio or both, and on 

which the programming consists 

primarily of music. 

(3) A Pre-1972 Recording Share 

adjustment as described in paragraph (e) 

of this section is available to a Licensee 

only if— 

(i) The Reference Channels constitute 

a large majority of the music channels 

offered on the Licensee’s SDARS and 

are generally representative of the music 

channels offered on the Licensee’s 

SDARS; and 

(ii) The Licensee timely provides the 

relevant information required by 

§ 382.13(h). 

■ 13. Section 382.13 is amended as 

follows: 

■ a. By revising paragraphs (c) and (d); 

■ b. In paragraph (e)(3), by removing 

‘‘handwritten’’; and 

■ c. By adding paragraph (h). 

The revisions and addition read as 

follows: 

§ 382.13 Terms for making payment of 

royalty fees and statements of account. 

* * * * * 

(c) Monthly payments. A Licensee 

shall make any payments due under 

§ 382.12 on a monthly basis on or before 

the 45th day after the end of each month 

for that month. All payments shall be 

rounded to the nearest cent. 

(d) Late payments and statements of 

account. A Licensee shall pay a late fee 

of 1.5% per month, or the highest lawful 

rate, whichever is lower, each for any 

payment or statement of account, or 

either of them received by the Collective 

after the due date. Late fees shall accrue 

from the due date until payment and the 

statement of account are received by the 

Collective. 

* * * * * 

(h) Notification of exclusions. (1) As 

a condition to a Licensee’s taking a 

Direct License Share adjustment as 

described in § 382.12(d), by no later 

than the due date for the relevant 

payment under paragraph (c) of this 

section, the Licensee must provide the 

Collective a list of each Copyright 

Owner from which the Licensee claims 

to have a direct license of rights to 

Directly-Licensed Recordings that is in 

effect for the month for which the 

payment is made, and of each sound 

recording as to which the Licensee takes 

such an adjustment (identified by 

featured artist name, sound recording 

title, and International Standard 

Recording Code (ISRC) number or, 

alternatively to the ISRC, album title 

and copyright owner name). 

Notwithstanding § 382.14, the Collective 

may disclose such information as 

reasonably necessary for it to confirm 

whether a claimed direct license exists 

and claimed sound recordings are 

properly excludable. 

(2) As a condition to a Licensee’s 

taking a Pre-1972 Recording Share 

adjustment as described in § 382.12(e), 

by no later than the due date for the 

relevant payment under paragraph (c) of 

this section, the Licensee must provide 

the Collective a list of each Pre-1972 

Recording as to which the Licensee 

takes such an adjustment (identified by 

featured artist name, sound recording 

title, and International Standard 

Recording Code (ISRC) number or, 

alternatively to the ISRC, album title 

and copyright owner name). 

§ 382.14 [Amended] 

■ 14. Section 382.14 is amended as 

follows: 

■ a. In the introductory text of 

paragraph (d), by adding ‘‘, subject to an 

appropriate confidentiality agreement,’’ 

after ‘‘limited’’; 

■ b. In paragraph (d)(1), by removing ‘‘, 

subject to an appropriate confidentiality 

agreement,’’; 

■ c. In paragraph (d)(2), by removing ‘‘, 

subject to an appropriate confidentiality 

agreement,’’; 

■ d. In paragraph (d)(3), by removing 

‘‘114(f)’’ and adding ‘‘114’’ in its place 

and by removing ‘‘, subject to an 

appropriate confidentiality agreement,’’ 

each place it appears; and 

■ d. In paragraph (d)(4), by removing 

‘‘114(f)’’ and adding ‘‘114’’ in its place. 

■ 15. Section 382.15 is amended by 

revising paragraph (g) to read as follows: 

§ 382.15 Verification of royalty payments. 

* * * * * 

(g) Costs of the verification procedure. 

The Collective shall pay all costs 

associated with the verification 

procedure, unless it determines that the 

Licensee underpaid royalties in an 

mstockstill on DSK4VPTVN1PROD with RULES3

23100 Federal Register / Vol. 78, No. 74 / Wednesday, April 17, 2013 / Rules and Regulations 

amount of 10% or more, in which case 

the Licensee shall, in addition to paying 

the amount of any underpayment, bear 

the reasonable costs of the verification 

procedure. 

■ 16. Section 382.16 is amended by 

revising paragraph (g) to read as follows: 

§ 382.16 Verification of royalty 

distributions. 

* * * * * 

(g) Costs of the verification procedure. 

The Copyright Owner or Performer 

requesting the verification procedure 

shall pay all costs associated with the 

procedure, unless it is finally 

determined that the Licensee underpaid 

royalties in an amount of 10% or more, 

in which case the Collective shall, in 

addition to paying the amount of any 

underpayment, bear the reasonable costs 

of the verification procedure. 

Dated: February 14, 2013. 

Suzanne M. Barnett, 

Chief Copyright Royalty Judge. 

Approved by: 

James H. Billington, 

Librarian of Congress. 

[FR Doc. 2013–08657 Filed 4–16–13; 8:45 am] 

BILLING CODE 1410–72–P 

mstockstill on DSK4VPTVN1PROD with RULES3