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[Federal Register Volume 79, Number 2 (Friday, January 3, 2014)]
[Notices]
[Pages 410-412]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30916]

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LIBRARY OF CONGRESS

Copyright Royalty Board

[14-CRB-0002-NSR (2016-2020)]

Determination of Royalty Rates for New Subscription Services for 
Digital Performance Right in Sound Recordings and Ephemeral Recordings

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Notice announcing commencement of proceeding with request for 
Petitions to Participate.

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SUMMARY: The Copyright Royalty Judges announce the commencement of the 
proceeding to determine the rates and terms for the use of sound 
recordings in transmissions made by new subscription services and for 
the making of ephemeral recordings necessary for the facilitation of 
such transmissions for the period beginning on January 1, 2016, and 
ending on December 31, 2020. A party wishing to participate in this 
rate determination proceeding must file its Petition to Participate and 
the accompanying $150 filing fee by the deadline in this notice.

DATES: Petitions to Participate and the filing fee are due no later 
than February 3, 2014.

ADDRESSES: Participants must submit a Petition to Participate in a 
hard-copy original, with five paper copies and an electronic copy in 
Portable Document Format (PDF) on a Compact Disc, along with the $150 
filing fee, to the Copyright Royalty Board by either mail or hand 
delivery. Participants may not submit Petitions to Participate and the 
$150 filing fee by an overnight delivery service other than the U.S. 
Postal Service Express Mail. If participants choose to use the U.S. 
Postal Service (including overnight delivery), they must address their 
submissions to: Copyright Royalty Board, P.O. Box 70977, Washington, DC 
20024-0977. If participants choose hand delivery by a private party, 
they must deliver the submissions to the Library of Congress, James 
Madison Memorial Building, LM-401, 101 Independence Avenue SE., 
Washington, DC 20559-6000. If participants choose delivery by a 
commercial courier, they must deliver the submissions to the 
Congressional Courier Acceptance Site, located at 2nd and D Street NE., 
Washington, DC. The envelope must be addressed to: Copyright Royalty 
Board, Library of Congress, James Madison Memorial Building, LM-403, 
101 Independence Avenue SE., Washington, DC 20559-6000.

FOR FURTHER INFORMATION CONTACT: LaKeshia Keys, CRB Program Specialist, 
by telephone at (202) 707-7658 or email at crb@loc.gov.

SUPPLEMENTARY INFORMATION:

Background

    Section 114(f)(2)(C) of the Copyright Act, title 17 of the United 
States Code, provides that a copyright owner of sound recordings or an 
eligible nonsubscription service or a new subscription service may file 
a petition with the Copyright Royalty Judges (Judges) requesting the 
determination of reasonable terms and rates of royalty payments for a 
new type of eligible nonsubscription service or a new subscription 
service on which sound recordings are performed that is or is about to 
become operational. Upon receipt of such a petition, the Judges must 
commence a proceeding to determine such reasonable terms and rates by 
publishing a notice in the Federal Register. 17 U.S.C. 
803(b)(1)(A)(i)(III), 804(b)(3)(C)(ii).
    In 2005, the Judges received a petition requesting that reasonable 
rates and terms be set for a new type of subscription service that 
``performs sound recordings on digital audio channels programmed by the 
licensee for transmission by a satellite television distribution 
service to its residential customers, where the audio channels are 
bundled with television channels as part of a `basic' package of 
service and not for a separate fee''; the Judges commenced a proceeding 
as required by section 804(b)(3)(C)(ii). See 70 FR 72471, 72472 (Dec. 
5, 2005). The Judges adopted the rates and terms agreed to by the 
parties to that proceeding \1\; those rates expired on December 31, 
2010. See 72 FR 72253 (Dec. 20, 2007).
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    \1\ The rates are codified at 37 CFR Part 383.
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    In order to have successor rates and terms in place prior to the 
expiration of those rates, the Judges, in 2009, commenced the rate 
determination proceeding for the 2011-2015 period for the new 
subscription service as defined in Sec.  383.2(h). See 17 U.S.C. 
804(b)(3)(C), 74 FR 319 (Jan. 5, 2009). The parties reached agreement 
regarding the rates and terms for the 2011-2015 license period and the 
Judges adopted them in 2010. See 75 FR 14074 (Mar. 24, 2010). With the 
current rates set to expire on December 31, 2015, the Judges, by this 
notice, commence the rate proceeding for the license period 2016-2020. 
See 17 U.S.C. 803(b)(1)(A)(i)(III), 804(b)(3)(C).

Scope of Proceeding

    In addition to all other submissions and arguments required by the 
Act and the applicable regulations, and in addition to any other 
submissions or arguments that the Participants choose to make, the 
Judges note below certain potential matters that the Participants may 
elect to address in this proceeding.
    The Judges are open to receiving evidence, testimony, and argument 
regarding any reasonable rate structure that a Participant may elect to 
propose, such as, inter alia, a rate structure based on the number of 
subscribers or a percentage of webcaster revenue. This openness is 
consistent with the determination in Web II, 72 FR at 24089,\2\ in 
which the Judges held that, although the record did not support a 
percentage-of-revenue based royalty, ``[t]his does not mean that some 
revenue-based metric could not be successfully developed as a proxy for 
the usage-based metric at some time in the future. . . .'' The Judges 
make particular note of this holding in Web II because they recognize 
that, as a practical and strategic matter, participants in these 
proceedings carefully consider prior rate proceedings as roadmaps to 
ascertain the structure of the rates they propose.
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    \2\ Digital Performance Right in Sound Recordings and Ephemeral 
Recordings, Final rule and order, 72 FR 24084 (May 1, 2007), aff'd 
in relevant part sub nom. Intercollegiate Broad. Sys. v. Copyright 
Royalty Bd., 574 F.3d 748 (D.C. Cir. 2009) (Web II).
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    Pursuant to 17 U.S.C. 114(f)(2)(B), ``[i]n determining . . . rates 
and terms the Copyright Royalty Judges shall base their decision on . . 
. information presented by the parties. . . .'' (emphasis added). Thus, 
the Judges are best served if the participants, their economic 
witnesses, and their counsel craft arguments in a manner that assists 
the Judges in identifying and applying the optimal economic analysis 
when establishing rates and terms pursuant to the Act. As a former 
federal appellate jurist has noted:

    The truism that judicial analysis, economic or otherwise, takes 
place only in the context of lawsuits between two or more parties 
imposes a practical constraint on the judge's ability to use 
economic analysis. . . . [A] judge will, for the most part, be 
limited by what the parties serve up to her.

Patricia Wald, Limits on the Use of Economic Analysis in Judicial

[[Page 411]]

Decisionmaking, 50 Duke J.L. & Contemp. Prob. 225, 228 (1987).
    Accordingly, the Judges invite Participants, within the written 
direct statements, written rebuttal statements, proposed findings of 
fact and conclusions of law, and through their witnesses and attorneys, 
as appropriate, to consider addressing the following questions.\3\
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    \3\ Nothing in this section should be construed as a statement 
by the Judges that any evidence or testimony proffered will be 
ultimately deemed admissible, competent, relevant, probative, or 
dispositive as to any issue, or that the Judges will ultimately 
consider, accept, or adopt any argument made in response to this 
section. Additionally, nothing in this section should be construed 
as an indication that the Judges will consider ultimately any of 
these issues in any determination rendered by them. Finally, by 
soliciting information regarding these issues, the Judges are not 
indicating that they have reached any preliminary decisions as to 
any of these issues.
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1. What is the importance, if any, of the presence of economic 
variations among buyers and sellers?

    Web II contains the following observation.

In the hypothetical marketplace we attempt to replicate, there would 
be significant variations, among both buyers and sellers, in terms 
of sophistication, economic resources, business exigencies, and 
myriad other factors.

Web II, 72 FR at 24087 (emphasis added). This statement echoed the 
Librarian's finding in Webcaster I (Web I) \4\ that a marketplace 
unconstrained by a statutory license would experience ``a range of 
negotiated rates. . . .'' Web I, 67 FR at 45244.
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    \4\ Determination of Reasonable Rates and Terms for the Digital 
Performance of Sound Recordings and Ephemeral Recordings, Final rule 
and order, 67 FR 45240 (July 8, 2002) (Web I).
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    If the marketplace indeed would establish multiple rates, the 
adoption of a rate structure consistent with that result might be more 
realistic than a single per-performance rate. When such ``significant 
variations'' exist, especially among ``willing buyers,'' each buyer may 
place a different economic value on a performance. To impose a rate 
that is economically appropriate for one such willing buyer upon any or 
all other willing buyers might not necessarily satisfy the statutory 
requirement of replicating the marketplace, but rather might be 
inconsistent with the rate structure of an actual market for sound 
recordings. Thus, the Judges invite the Participants to address in 
their proffered evidence, testimony, and/or arguments whether any 
economic variations among commercial webcasters might affect the 
selection of an appropriate rate structure.

2. Should royalty rates embody any form of economic ``price 
discrimination'' in order to reflect the statutory hypothetical 
marketplace?

    In Web II, the Judges set forth a concise and accurate summary of 
market circumstances in which price discrimination--and therefore 
multiple prices for the same good or service--will arise:

    A segmented marketplace may have multiple equilibrium prices 
because it has multiple demand curves for the same commodity 
relative to a single supply curve. . . . In other words, price 
differentiation or price discrimination is a feature of such 
markets. The multiple demand curves represent distinct classes of 
buyers and each demand curve exhibits a different price elasticity 
of demand. . . . Typically, the submarket characterized by lesser 
price elasticity will exhibit a higher price. All the economists who 
testified in this proceeding, for both the Services and the 
copyright owners generally agreed with this description.

72 FR at 24097 (emphasis added); see also Web I, 67 FR at 45258 
(``economic differences between . . . businesses'' would cause a per-
performance rate appropriate for one type of business ``to overstate 
the market value'' of a performance for another type of business).\5\
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    \5\ The Judges understand the foregoing statements in Web I and 
Web II regarding price discrimination to explain why rates for 
noncommercial webcasters were lower than rates for commercial 
webcasters.
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    ``[A] seller price discriminates by charging different prices to 
buyers when the price difference cannot be explained by a cost 
difference in supplying the copyrighted work.'' Michael Meurer, 
Copyright Law and Price Discrimination, 23 Cardozo L. Rev. 55, 58 
(2001); see also Jean Tirole, The Theory of Industrial Organization 
133-34 (1988) (``Price discrimination reflects differences in the mark-
up of price over marginal cost across sales.''); Harold Demsetz, The 
Private Production of Public Goods, 13 J. Law & Econ. 293, 303-04 
(1970) (``There is no single price that can satisfy all equilibrium 
requirements . . . under the condition that differences in demand 
prices can be identified at relatively low cost. . . . [C]ompetitively 
produced public goods lend themselves to price discrimination.''); Paul 
Samuelson, Aspects of Public Expenditure Theories, 40 The Rev. of Econ. 
& Statistics, 332, 336 (1958) (when attempting to price additional 
copies of public goods with marginal costs approximating zero ``the 
easy formulas of classical economics no longer light our way.''); see 
generally William Baumol, Regulation Misled by Misread Theory 6 (AEI-
Brookings Joint Center Distinguished Lecture Award Monograph 2006) 
(``[U]nder common conditions, firms will adopt price discrimination as 
their optimal strategy for recoupment of common costs. . . . [U]nder 
competitive conditions, the firm will normally be forced to adopt 
discriminatory pricing wherever that is feasible. Put another way, 
uniform pricing is not to be taken as the normal characteristic of 
equilibrium of the competitive firm.'') (emphasis in the original).
    The Judges invite the Participants to include in their proffered 
evidence, testimony, and/or arguments a consideration of the potential 
applicability or inapplicability of price discrimination within the 
commercial webcaster segment of the market as well.

3. What are the potential disadvantages of establishing a statutory 
royalty rate not based on a per performance royalty rate?

    Although there are possible advantages to the establishment of a 
statutory royalty rate based upon a structure other than a per-
performance method, there are potential disadvantages as well. 
Accordingly, the Judges invite the Participants to include, in their 
proffered evidence, testimony, and/or arguments, information regarding 
any potential disadvantages to modifying or departing from a per-
performance royalty rate. In response to this question, the Judges 
invite the Participants to consider the following specific sub-issues.

a. Is it prohibitively difficult to identify webcaster revenues for the 
purpose of calculating a percentage-of-revenue based royalty rate?

    In Web II, the Judges described the following three areas in which 
potential problems existed in the percentage-of-revenue rate proposals 
presented by the participants in that proceeding: (1) Revenue 
measurement; (2) revenue definition; and (3) auditing and enforcement. 
72 FR at 24089-90. The present Judges remain concerned with whether 
those potential problems would affect any potential use of a 
percentage-of-revenue based royalty rate. Accordingly, the Judges 
invite the Participants to include, in their proffered evidence, 
testimony, and/or arguments, a discussion of such potential problems 
and any proposed means to resolve such problems.

[[Page 412]]

b. Is there an ``intrinsic'' value to a performance of a sound 
recording that is omitted if a percentage of revenue royalty rate were 
to be adopted?

    In Web II, the Judges expressed a concern that a percentage-of-
revenue based royalty rate would fail to capture the ``intrinsic'' 
value of a performance of a sound recording. Id. The Judges in Web IV 
are interested in the Participants' understanding of the ``intrinsic'' 
value, if any, of a performance of a sound recording.
    Accordingly, the Judges invite the Participants to include, in 
their proffered evidence, testimony, and/or arguments, a discussion of 
their understanding of the ``intrinsic'' value, if any, of a 
performance of a sound recording, and how it might not be embodied in a 
royalty rate calculated as a percentage of webcaster revenue.

c. Would a royalty rate calculated as a percentage of webcasters' 
revenue be ``disproportionate'' to webcasters' use of sound recordings?

    In Web II, the Judges also expressed concern regarding whether a 
disparity could arise between a royalty rate calculated as a percentage 
of webcaster royalty and webcaster use of sound recordings. Id. The 
present Judges share that concern.
    Specifically, the Judges inquire whether ``disproportionality'' 
could arise if some webcasters declined to attempt to maximize profits, 
and instead attempted to maximize market share. Licensors then would 
suffer the ``opportunity cost'' of foregone revenues. Cf. William 
Baumol, The Free Market Innovation Machine 221 (2002) (licensors must 
consider not only the marginal dollar cost, but also the ``opportunity 
cost'' of granting a licensing to a given licensee). As noted by one of 
SoundExchange's economic experts during the proceedings in Web III, Dr. 
Janusz Ordover, both of these reactions--profit maximization and market 
share maximization--would be possible outcomes. Ordover WRT at ]] 25-
26.
    The Judges also seek evidence, testimony and argument on whether 
this risk could be mitigated by combining a percentage-of-revenue based 
royalty rate with a significant minimum fee. See H.R. Rep. No. 105-796, 
at 85-86 (1998) (Conf. Rep.) (``A minimum fee should ensure that 
copyright owners are fairly compensated in the event that other 
methodologies for setting rates might deny copyright owners an adequate 
royalty. For example . . . a minimum fee [should be set] that 
guarantees that a reasonable royalty rate is not diminished by 
different types of marketing practices or contractual relationships. . 
. . [I]f the base royalty for a service were a percentage of revenues, 
the minimum fee might be a flat rate per year (or a flat rate per 
subscription per year for a new subscription service)'' (emphasis 
added).
    Accordingly, the Judges invite the Participants to include, in 
their proffered evidence, testimony, and/or arguments, a discussion of 
the problem of ``disproportionality'' between a royalty rate based upon 
a percentage of webcaster revenue and the use by webcasters of sound 
recordings, including the details identified supra.

Petitions To Participate

    Parties with a significant interest must file Petitions to 
Participate (PTP) in accordance with 37 CFR 351.1(b)(1). PTPs must be 
accompanied by the $150 filing fee in the form of check or money order 
payable to the ``Copyright Royalty Board''; cash will not be accepted.
    The Judges will address scheduling and further procedural matters 
after receiving PTPs.

    Dated: December 20, 2013.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
[FR Doc. 2013-30916 Filed 1-2-14; 8:45 am]
BILLING CODE 1410-72-P
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