INTERIM PUBLIC VERSION

Before the

UNITED STATES COPYRIGHT OFFICE

LIBRARY OF CONGRESS

____________________________________

)

In the Matter of )

)

RATE SETTING FOR ) Docket No. 2000-9

DIGITAL PERFORMANCE RIGHT ) CARP DTRA 1 & 2

IN SOUND RECORDINGS AND )

EPHEMERAL RECORDINGS )

____________________________________)

REPORT OF THE COPYRIGHT ARBITRATION ROYALTY PANEL

February 20, 2002

Eric E. Van Loon

Chairperson

Jeffrey S. Gulin

Arbitrator

Curtis E. von Kann

Arbitrator
i

TABLE OF CONTENTS

PAGE

I. INTRODUCTION.......................................................................... 1

A. SUBJECT OF THE PROCEEDING...................................................... 1

B. PARTIES TO THE PROCEEDING....................................................... 2

C. THE STATUTORY BACKGROUND.................................................... 4

1. Music Copyright Law in General....................................................... 4

2. The DPRA................................................................................. 6

3. The DMCA................................................................................ 8

II. THE PROCEEDINGS.................................................................... 10

A. PRE-HEARING PROCEEDINGS........................................................ 10

B. THE DIRECT CASES...................................................................... 11

C. THE REBUTTAL CASES................................................................. 15

D. THE SUSPENSION OF PROCEEDINGS............................................... 17

E. POST-HEARING SUBMISSIONS AND ARGUMENTS............................ 18

F. THE ENORMITY OF THE RECORD................................................... 18

III. THE STATUTORY CRITERIA FOR SETTING RATES AND TERMS 19

A. SECTION 114(f)(2)......................................................................... 19

1. The Statutory Language.................................................................. 19

 2. The Relationship of the Statutory Factors to

 the “Willing Buyer/Willing Seller” Standard....................................... 19

3. The Nature of “The Marketplace”...................................................... 21
ii

4. The Appropriate Willing Buyer/ Willing Seller Rate............................... 24

B. SECTION 112(e)........................................................................... 25

IV. RATE PROPOSALS OF THE PARTIES FOR WEBCASTING SERVICES 26

 A. RIAA RATE PROPOSALS............................................................... 26

 B. WEBCASTER RATE PROPOSALS................................................... 27

 V. THE PANEL’S DETERMINATION OF ROYALTY RATES

 FOR WEBCASTER AND BROADCASTER SERVICES.......................... 32

 A. APPLICATION OF THE SECTION 114(f)(2) AND

 SECTION 112(e) STATUTORY FACTORS............................................ 32

 1. Section 114 ............................................................................... 32

 2. Section 112................................................................................ 35

B. A PER-PERFORMANCE VERSUS A PERCENTAGE-OF-REVENUE 

 FEE MODEL................................................................................. 36

C. A THEORETICAL ECONOMIC MODEL VERSUS 

 NEGOTIATED AGREEMENTS........................................................

38

 1. The Shortcomings of the Theoretical Model........................................ 38

2. The Model is Based Upon a Different Market...................................... 40

 3. The Conversion from Percentage of Revenues.................................... 42

D. COMPARABLE AGREEMENTS ARE THE BEST BENCHMARKS............ 43

 E. THE [REDACTE D]

 LICENSE AGREEMENT................................................................ 44

 F. THE 26 RIAA LICENSE AGREEMENTS CONSTITUTE 

 THE NEXT CLOSET APPROXIMATION OF THE 

 HYPOTHECTICAL MARKETPLACE................................................. 45

 G. CLOSE SCRUTINY REQUIRED....................................................... 47

1. The RIAA Negotiating Strategy....................................................... 48
iii

2. Licensees That Paid Little or No Royalties

 or Quickly Ceased Operating................................................... 51

 3. Licensees that Could Not Wait for the Statutory License.......................... 54

 4. MusicMatch License Agreement...................................................... 56

 5. Lomasoft License Agreement.......................................................... 57

 6. Weight To Be Given the 25 Non-Yahoo! Agreements........................... 59

7. The Yahoo! License Agreement...................................................... 60

 (a) Description of the Yahoo! Streaming Service................................... 61

 (b) The Yahoo! Terms.................................................................. 61

 (c) The Yahoo! Negotiation............................................................ 64

 (d) Other Factors Affecting the Yahoo! Rates..................................... 67

 (e) Impact of the Yahoo! Agreement................................................ 69

 H. RIAA’S “CORROBORATING EVIDENCE”........................................... 70

 1. The 115 Record Company Agreements.............................................. 71

 2. The Georgia Pacific Analysis.......................................................... 71

 3. The Economic Value Estimation...................................................... 72

I. DETERMINATION OF SECTION 114(f)(2) WEBCASTING RATES.............. 74

 1. The Internet-Only Webcasting Rate................................................... 75

 2. The Radio Retransmissions Rate....................................................... 77

J. SECTION 114(f)(2) RATES FOR OTHER WEBCASTING SERVICES.......... 78

 1. “Business to Business” Webcasting Services (“Syndicators”)................. 78

 2. “Listener-Influenced” Services......................................................... 80

K. ROYALTY RATES FOR COMMERCIAL BROADCASTERS..................... 82
iv

 1. Introduction............................................................................... 82

 

 2. Procedural History....................................................................... 82

 3. Positions of the Parties................................................................... 83

 4. Determination of Commercial Broadcaster Rates................................... 83

 5. Archived Programming, Side Channels, and Substituted Programming..... 86

L. ROYALTY RATES FOR NON-CPB,

 NON-COMMERCIAL BROADCASTERS............................................. 88

M. THE MINIMUM FEE FOR WEBCASTING SERVICES............................ 94

N. SECTION 112(e) EPHEMERAL RECORDING RATES FOR 

WEBCASTING SERVICES............................................................. 96

 1. The Nature of Ephemeral Copies..................................................... 96

 2. The Value Of Ephemeral Copies...................................................... 97

 (a) The Services’ View.................................................................. 97

 (b) The Copyright Office View......................................................... 98

 (c) The Congressional View............................................................ 98

 (d) Evidence from the Marketplace.................................................... 99

 3. Four Measures from the 26 Agreements................................... 99

 

 4. The Panel’s Ephemeral Royalty Determination.................................. 104

 O. OTHER ISSUES........................................................................... 105

 1. Same Rates for Both License Periods............................................... 105

 2. Long Song Surcharge.................................................................. 105

 3. Partial Performances.................................................................... 105

 4. Incidental Performances............................................................... 108
v

 5. Performances of Sound Recordings Already Licensed........................ 108

 6. Definition of a Performance........................................................... 108

 7. Calculating Number of Performances................................................ 109

 8. Discount for Promotion and Security................................................ 110

VI. ROYALTY RATES FOR BUSITNESS ESTABLISHMENT SERVICES 111

 A. NATURE OF THE SERVICE............................................................ 111

B. RATE PROPOSALS OF THE PARTIES............................................... 114

 1. DMX/AEI’s Rate Proposal............................................................ 114

 2. RIAA’s Rate Proposal................................................................ 115

C. WHAT IS THE ROYALTY FOR?...................................................... 116

D. DETERMINING THE ROYALTY RATE............................................. 119

 1. The Views of Congress and the Copyright Office.............................. 119

 2. The Statutory Factors.................................................................. 120

 3. Agreements From Which Marketplace?........................................... 121

 4. Royalties Evidenced By the Pertinent Agreements.............................. 122

 VII. TERMS FOR SECTION 114(f) AND 112(e) LICENSES................... 128

 A. THE GOVERNING STANDARD....................................................... 128

 B. THE RECORD CONCERNING WILLING BUYER/

WILLING SELLER AGREEMENT................................................ 130

 C. DISPUTED TERMS...................................................................... 131

 1. Definitions of Certain Terms......................................................... 132

 2. Agent for Copyright Owners Who Do Not Designate An Agent............ 132

 D. THE FORMAT OF APPENDIX B..................................................... 134
vi

 VIII. DETERMINATION AND ASSESSMENT OF COSTS....................... 135

 IX. CERTIFICATION BY THE CHAIRPERSON.................................. 135
vii

APPENDICES

A. SUMMARY OF ROYALTY RATES FOR SECTION 114(f) AND 

 112(e) STATUTORY LICENSES................................................................... A-1

B. RATES AND TERMS FOR ELIGIBLE NONSUBSCRIPTION 

 TRANSMISSIONS AND THE MAKING OF 

 EPHEMERAL REPRODUCTIONS............................................................... B-1

C. EXHIBITS OFFERED DURING THE DIRECT CASES....................................... C-1

D. EXHIBITS OFFERED DURING THE REBUTTAL CASES.................................. D-1
1

INTERIM PUBLIC VERSION

Before the

UNITED STATES COPYRIGHT OFFICE

LIBRARY OF CONGRESS

______________________________________

)

In the Matter of )

)

RATE SETTING FOR ) Docket No. 2000-9

DIGITAL PERFORMANCE RIGHT ) CARP DTRA 1 & 2

IN SOUND RECORDINGS AND )

EPHEMERAL RECORDINGS )

_____________________________________)

REPORT OF THE COPYRIGHT ARBITRATION

ROYALTY PANEL TO THE LIBRARIAN OF CONGRESS

Pursuant to 37 C.F.R. § 251.53, the undersigned members of the Copyright

Arbitration Royalty Panel hereby submit the Panel’s Report to the Librarian of Congress.

I. INTRODUCTION

A. SUBJECT OF THE PROCEEDING

This is a rate adjustment proceeding convened under 27 C.F.R. § 251 et seq.,

pursuant to which this Copyright Arbitration Royalty Panel (“CARP” or “the Panel”) has

been empanelled to set compulsory license fees for eligible1 nonsubscription digital audio

 

1

 There is dispute as to whether transmissions by certain parties to this proceeding (alleged to be

“interactive” services and thus not eligible for licenses under 17 U.S.C. 114(d)(2)) meet the

definition of eligible nonsubscription transmissions. However, the Copyright Office has ruled

that “the Panel’s responsibility is to ... set appropriate rates, and not to discern whether a

particular service meets the eligibility requirements for using the license.” 65 Fed. Reg. 77292,

77333 (Dec. 11, 2000). See also Docket No. 2000-9 DTRA 1 & 2, Order of July16, 2001, at 5-7,
2

transmissions of sound recordings as provided for in § 114 of the Digital Millennium

Copyright Act (“DMCA”), as well as for the making of ephemeral copies to facilitate

such transmissions, as provided for in § 112 of the DMCA. This CARP is setting fees for

two license periods: (a) October 28, 1998 - December 31, 2000, and (b) January 1, 2001

- December 31, 2002.

The subject matter underlying this proceeding -- access to music – spans from

ancient antiquity to state-of-the-art technology. Humankind’s affinity for music extends

from ancient campfires to today’s capacity to transmit music across vast distances and

hear it played with remarkable fidelity. The Panel is cognizant that the decision it renders

today could significantly affect citizen access to music for years to come.

B. PARTIES TO THE PROCEEDING

The current 2 parties to this proceeding are: (i) the “Webcasters,” namely,

BET.com, Comedy Central, Echo Networks, Inc. (“Echo”), Listen.com, Live365.com,

MTVi Group, LLC (“MTVi”), Myplay, Inc. (“MyPlay”), NetRadio Corp. (“NetRadio”),

Radio Active Media Partners, Inc. (“RadioAMP”), RadioWave.com, Inc.

(“RadioWave”), Spinner Networks Inc. (“Spinner.com”), and XACT Radio Network

LLC (“XACT”); (ii) the FCC-licensed radio Broadcasters, namely, Susquehanna Radio

 

9 (hereinafter, orders of both the Copyright Office and the Panel respecting this docket shall be

cited as “Order of” followed by the date of the order and page number).

2

 At the outset of the proceeding, Webcaster parties also included Coollink Broadcast Network,

Everstream, Inc., Incanta, Inc., Launch Media, Inc., MusicMatch, Inc., Univision Online, and

Westwind Media.com, Inc., which have since withdrawn or been dismissed from the proceeding.

National Public Radio (“NPR”) reached a private settlement with RIAA. Because RIAA,

AFTRA, AFM, and AFIM propose the same rates and take similar positions on most issues, they

are sometimes referred to collectively as “RIAA” or “Copyright Owners and Performers” for

convenience. Similarly, Webcasters, Broadcasters, and the Business Establishment Services are

sometimes referred to collectively as “the Services.”
3

Corporation, Clear Channel Communications Inc., Entercom Communication

Corporation, Infinity Broadcasting Corporation, and National Religious Broadcasters

Music License Committee (collectively “ the Broadcasters”); (iii) the Business

Establishment Services, namely, DMX/AEI Music Inc. (also referred to as “Background

Music Services”); (iv) American Federation of Television and Radio Artists (“AFTRA”);

(v) American Federation of Musicians of the United States and Canada (“AFM”); (vi)

Association For Independent Music (“AFIM”); and (vii) Recording Industry Association

of America (“RIAA”).

The Webcasters are internet services that each employ a technology known as

“streaming,”3 but comprise a range of different business models and music programming.

See e.g., Written Direct Testimony4 of Zittrain at 2; Tr. 6917-33 (Mills); Tr. 4025-29

(Lyons); Tr. 4554-77 (Porteus); Tr. 7277-97 (Roy); Tr. 8151-90 (Jeffrey).

The Broadcasters are commercial AM or FM radio stations that are licensed by

the Federal Communications Commission (“FCC”).

 

3

 The Webcasters’ activity, sending music or other audio programming over the Internet to the

listener’s computer, is known as “streaming” because the webcaster “streams” packets of

digitized transmissions in a time-dependent, location-dependent manner. See Griffin W.D.T. 4-8.

To the listener, it seems like traditional radio, but unlike radio signals that are “broadcast,” the

streams are transmitted to individual recipients. The recipient’s computer receives the streamed

packets, reassembles them, and plays them back via common software programs known as

“players.” See id. Unlike “downloads,” which may be permanently stored in the recipient’s

computer, the digits of streamed music are designed to be used once and then discarded. See id.

4

 Hereinafter, references to written direct testimony shall be cited as "W.D.T" preceded by the last

name of the witness and followed by the page number. References to written rebuttal testimony

shall be cited as "W.R.T" preceded by the last name of the witness and followed by the page

number. References to the transcript record shall be cited as "Tr." followed by the page number

and the last name of the witness. References to proposed findings of fact and conclusions of law

shall be cited as "PFFCL" preceded by the name of the party that submitted same and followed by

the paragraph number. References to reply proposed findings of fact and conclusions of law shall

be cited as “RPFFCL” preceded by the party and followed by the paragraph number.
4

The Business Establishment Services, DMX/AEI Music,5 deliver sound recordings to

business establishments for the enjoyment of the establishments’ customers. See Knittel

W.D.T. 4

RIAA is a trade association representing record companies, including the five

“majors” and numerous “independent” labels. Its SoundExchange division has been

designated by RIAA member copyright owners (who account for about 90% of all sound

recordings legitimately distributed in the United States) as the non-exclusive agent to

collect and to distribute Section 112 and 114 royalties. See Rosen W.D.T. 4; Tr. 438-39

(Rosen).

AFTRA, the American Federation of Television and Radio Artists, is a national

labor organization representing performers and newspersons. See Tr. 2830 (Himelfarb).

AFM, the American Federation of Musicians, is a labor organization representing

professional musicians. See Bradley W.D.T. 1.

AFIM, the Association For Independent Music, is a trade association representing

independent record companies, wholesalers, distributors and retailers. See Tr. 2830

(Himelfarb).

C. THE STATUTORY BACKGROUND

1. Music Copyright Law in General

Section 102 of the Copyright Act of 1976 identifies various categories of works

that are eligible for copyright protection. See 17 U.S.C. § 102. These include “musical

works” and “sound recordings.” Id. at Section 102(2) and 102(7). The term “musical

 

5

 DMX/AEI Music is the successor company resulting from a merger between AEI Music

Network, Inc. (“AEI”) and DMX Music, Inc. (“DMX”).
5

work” refers to the notes and lyrics of a song, while a “sound recording” results from “the

fixation of a series of musical, spoken, or other sounds.” Id. at Section 101. Thus, for

example, the compact disc (“CD”) entitled Whitney Houston’s Greatest Hits contains

Whitney Houston’s rendition of I Will Always Love You and the CD entitled Jolene

contains Dolly Parton’s rendition of I Will Always Love You. Sherman W.D.T. 3-4. Each

of the two renditions constitute distinct sound recordings and both the sound recordings

and the single underlying musical work are “fixed” in the two CDs. See id. There are

separate copyrights in each sound recording of I Will Always Love You and these

copyrights are separate from the copyright in the underlying musical work. See id.

The copyright owner receives a bundle of exclusive rights including

“performance” rights and “reproduction and distribution” rights. See 17 U.S.C. §106.

Copyright owners of musical works are granted the exclusive right “to perform the

copyrighted work publicly.” Id. at 106(4). So, for example, the copyright owner has the

exclusive right to authorize, or license, a radio broadcaster to publicly perform the

musical work – to play a CD containing the copyrighted musical work such as I Will

Always Love You over the radio. See Sherman W.D.T. 6-7. However, the Section 106(4)

performance right does not extend to sound recordings. Accordingly, the broadcaster that

publicly performs (broadcasts) I Will Always Love You must be licensed by the copyright

owner6 of the musical work, but need not be licensed by the copyright owner of the sound

 

6

 Songwriters who create musical works generally assign an interest in their copyrights to musical

publishers who typically pay the songwriter an advance and a share of royalties that they collect

for licensing the musical work. See Sherman W.D.T. 11-12. Songwriters and publishers typically

bifurcate the administration of their rights. Performance rights in musical works are administered

in the United States by three performing rights societies (“PROs”) – the American Society of

Composers, Authors and Publishers (“ASCAP”); Broadcast Music, Inc. (“BMI”); and SESAC,

Inc. See id at 13. The PROs typically enter into licensing agreements on behalf of their member

songwriters and publishers with thousands of businesses that perform musical works. The PROs
6

recording. 7See id. Sections 106(1) and 106(3) grant copyright owners exclusive rights

“to reproduce the copyrighted work in copies or phonorecords” and to “distribute copies

or phonorecords of the copyrighted work to the public by sale ...” 17 U.S.C. §106(1), (3).

Musical works may be reproduced and distributed within the meaning of Sections 106(1),

(3) in three principal ways: (a) mechanical reproductions -- the recording of a musical

work on a CD, cassette, computer file or other phonorecord;8 (b) synchronizations -- the

recording of a musical work on a soundtrack of a motion picture or other audiovisual

work;9 and (c) print – the printing of a musical work on sheet music or in books. See

Sherman W.D.T. 9.

2. The DPRA

In 1995, Congress enacted the Digital Performance Right in Sound Recordings

Act (“DPRA”), which added a new Section 106(6) to the Copyright Act. That provision

grants copyright owners of sound recordings the exclusive right “to perform the

copyrighted work publicly by means of a digital audio transmission.” See 17 U.S.C.

§ 106(6) (emphasis added). This grants record companies and artists a new right: the

 

generally grant “blanket licenses” that permit the licensee to perform any musical works within

their repertories for a set license fee, as well as more limited licenses for specific purposes. See id.

Publishers typically handle the licensing of reproduction and distribution rights in musical works

through The Harry Fox Agency.

7

 Record companies normally handle the licensing of the copyright rights in their sound

recordings. But, as previously mentioned, a division of RIAA known as SoundExchange acts on

behalf of many record companies, including all of the majors, to license performance and

reproduction rights that are subject to the statutory licenses in Section 112 and 114. See Sherman

W.D.T. 14.

8

 The rights to authorize the recording and distribution of the phonorecord to the public are

commonly referred to as “mechanical rights.” See id.

9

 The rights to authorize these reproductions and distributions are commonly referred to as “sync

rights.” See id.
7

right to receive royalties when sound recordings are transmitted (“performed”) over the

internet. However, Congress limited this new Section 106(6) digital performance right

through certain exemptions that it set forth in an amended Section 114 of the Copyright

Act including, among others, exemptions for (a) nonsubscription broadcast transmissions;

(b) retransmission of broadcast radio stations within 150 miles of their transmitters; and

(c) transmissions to business establishments. See 17 U.S.C. § 114 (d)(1).

Congress also amended Section 114 to create a new compulsory license for

certain subscription digital audio services, which transmit sound recordings to cable

television and Direct Broadcast Satellite subscribers on a non-interactive basis. See 17

U.S.C. §114(d)(2). The compulsory license permits the services, upon compliance with

certain statutory conditions, to make those transmissions without obtaining consent from,

or having to negotiate license fees with, copyright owners of the recordings. Id. Congress

established procedures to facilitate voluntary negotiation of rates and terms for the

subscription services compulsory license. This included a provision authorizing

copyright owners and services to designate common agents on a nonexclusive basis to

negotiate licenses – as well as to pay, to collect, and to distribute royalties – and a

provision granting antitrust immunity for such actions. See RIAA Exhibit 113 DP (setting

forth Sections 114 and 801 of the Copyright Act as enacted in the DPRA); Sherman

W.D.T. 23-24.

Absent agreement, the Copyright Office must convene a CARP to recommend

royalty rates and terms for adoption by the Librarian of Congress. Congress directed the

CARP to set a royalty rate for the subscription services’ compulsory license that achieves

the policy objectives in Section 801(b)(1) of the Copyright Act. Id.
8

Under the DPRA, copyright owners must allocate one-half of the compulsory

licensing royalties that they receive from the subscription services compulsory license to

recording artists. Forty-five percent of the royalties must be allocated to featured artists;

21⁄2 percent of the royalties must be distributed by AFM to non-featured musicians; and

21⁄2 percent of the royalties must be distributed by AFTRA to non-featured vocalists. See

17 U.S.C. § 114(g).

3. The DMCA

After passage of the DPRA, a dispute arose concerning the proper treatment of

webcasters who stream sound recordings on a nonsubscription basis. The webcasters

argued that they were exempt under the DPRA from the Section 106(6) digital

performance right. The recording industry, on the other hand, took the position that the

DPRA did not exempt webcasters and that webcasters were required to obtain the consent

of copyright owners of the sound recordings that they transmit over the internet. See

Sherman W.D.T. 24; Tr. 321 (Sherman).

Congress resolved that dispute in 1998 with the passage of the DMCA. It made

clear in the DMCA that webcasting is subject to the Section 106(6) digital performance

right and that webcasters who transmit sound recordings on an interactive basis, as

defined in Section 114(j), must obtain the consent of, and negotiate fees with, individual

owners of those recordings. However, webcasting would be eligible for compulsory

licensing when done on a non-interactive basis. Accordingly, Congress created a new

compulsory license in Sections 114(d)(2) & (f)(2) for “eligible nonsubscription

transmissions,” which include non-interactive transmissions of sound recordings by

webcasters. 17 U.S.C. § 114(d)(2). To qualify for that compulsory license, the webcaster
9

must comply with several conditions in addition to those that the DPRA applied to

subscription services. As with the subscription services royalties, webcaster royalties are

allocated on a 50-50 basis to copyright owners and to performers. See generally Sherman

W.D.T. 24-28; RIAA Exhibit 114 DP at 79-91 (DMCA Conference Report); Bonneville

International Corp. et al v. Peters, 153 F. Supp. 2d 763, 768-69 (E.D.Pa.2001), appeal

pending.

Congress adopted the DPRA voluntary negotiation and CARP procedures for the

DMCA webcaster performance license. See 117 U.S.C. § 114(e),(f). However, it

changed the statutory standard by which a CARP must set rates and terms for the

webcaster compulsory license. Congress provided that the CARP must adopt rates and

terms for the webcaster performance license that “most clearly represent the rates and

terms that would have been negotiated in the marketplace between a willing buyer and a

willing seller.” 17 U.S.C. § 114(f)(2)(B).

Congress also recognized that webcasters who avail themselves of the Section

114 license may need to make one or more temporary or “ephemeral” copies of a sound

recording in order to facilitate the transmission of that recording. Accordingly, Congress

created a new compulsory license in Section 112(e) for such copies and extended that

compulsory license to services that transmit sound recordings to certain business

establishments under the Section 114(d)(1)(C)(iv) exemption created by the DPRA. See

generally Sherman W.D.T. 24-28; RIAA Exhibit 114 DP at 89-91 (DMCA Conference

Report).

Again, Congress adopted the DPRA voluntary negotiation and CARP procedures

for the Section 112 ephemeral license. 17 U.S.C. 112(e)(2),(3). And Congress again
10

directed the CARP to set rates and terms for this license that meet the willing

buyer/willing seller standard applicable to the Section 114 webcaster performance

license. 17 U.S.C. § 112(e)(4).

II. THE PROCEEDINGS

 A. PRE-HEARING PROCEEDINGS

Pursuant to Section 114(f)(4)(B)(i), on September 20, 1999, the Copyright Office

directed eligible nonsubscription services, that wish to rely upon the Section 114

compulsory license, to file appropriate notices with the Copyright Office by October 15,

1999 or, if they had not yet launched, prior to their first transmission. See 64 Fed. Reg.

50758 (September 20, 1999). As of early 2001, initial notices were filed for nearly 2,300

web sites, of which 1557 were filed by AM/FM broadcast radio stations. See RIAA

Exhibit 126 DP; Marks W.D.T. 4.

Pursuant to the six-month voluntary negotiation provision of the DMCA, on

November 27, 1998, the Librarian initiated a voluntary negotiation period covering the

timeframe October 28, 1998 through December 31, 2000. See 63 Fed. Reg. 65555

(November 27, 1998). On January 13, 2000, the Librarian initiated a second six-month

period for the parties to negotiate voluntary rates and terms covering January 1, 2001

through December 31, 2002. See 65 Fed. Reg. 2194 (January 13, 2000). RIAA,

designated by virtually all of its members and several non-member record labels as their

nonexclusive, common negotiating agent (see Tr. 321-22 (Sherman); Sherman W.D.T.

23-24), reached agreements with 26 webcasters during and subsequent to these two

formal negotiation periods. However, apparently because an industry-wide agreement

had not been reached, RIAA petitioned the Copyright Office on July 23, 1999 to
11

commence the CARP process for the period October 28, 1998 through December 31,

2000. On August 28, 2000 RIAA filed a second petition covering the period January 1,

2001 through December 31, 2002.

In response to RIAA’s petitions, the Copyright Office directed interested parties

to file notice of their intent to participate in the 1998-2000 CARP proceeding and the

2001-02 proceeding. See 64 Fed. Reg. 52107 (Sept. 27, 1999); 65 Fed. Reg. 55302 (Sept.

13, 2000); 65 Fed. Reg. 77393 (Dec. 11, 2000). RIAA, AFIM, AFM, AFTRA, about 43

webcasters, and 82 broadcasters filed notices of intent to participate. NPR filed notices to

participate on its own behalf and on behalf of non-commercial public radio stations

qualified for funding from the Corporation for Public Broadcasting. AEI and DMX

(prior to their merger) also filed separate notices of intent to participate.

B. THE DIRECT CASES

On April 11, 2001, RIAA filed its direct case. AFM, AFTRA and AFIM also

submitted direct cases and supported RIAA’s proposed rates. Twenty-five Webcasters

and Broadcasters submitted direct cases. NPR submitted a separate direct case and a

separate rate proposal covering public radio stations. AEI and DMX submitted direct

cases and a Section 112 rate proposal for organizations that transmit sound recordings to

business establishments.

The Panel conducted 31 days of hearings on the direct cases, commencing July

30, 2001 and ending September 14, 2001. A total of 49 witnesses testified.

RIAA presented the following witnesses during the direct case hearings: Cary

Sherman, Executive Vice President and General Counsel, RIAA; Hilary Rosen, President

and Chief Executive Officer, RIAA; Linda McLaughlin, Vice President, National
12

Economic Research Associates, Inc. (“NERA”); David Altschul, Vice Chairman and

General Counsel of Warner Bros. Records; Paul Katz, Senior Vice President of Business

Affairs for Zomba Music Publishing and Zomba Recording Corporation; Charles

Ciongoli, Senior Vice President of Finance, Universal Music Group; James Griffin, Chief

Executive Officer, Cherry Lane Digital, LLC; Ron Wilcox, Senior Vice President,

Business Affairs and Administration, Sony Music, U.S. and Executive Vice President,

Business Affairs and New Technology, Sony Music Entertainment Inc.; Paul Vidich,

Executive Vice President, Strategic Planning and Business Development, Warner Music

Group.; LaVerne Evans, Senior Vice President and General Counsel, Legal and Business

Affairs, BMG Entertainment; Anthony Pipitone, President, Warner Special Products,

Inc.; Lawrence Kenswil, President, Universal eLabs, Universal Music Group; Dr.

Thomas Nagle, Chairman, Strategic Pricing Group, Inc.; Jay Samit, Senior Vice

President, New Media, EMI Recorded Music; Steven Wildman, Professor of Economics

and Telecommunications studies at Michigan State University; Robert Yerman, Director

of Intellectual Property Practice for LECG, LLC; and Steven Marks, Senior Vice

President, Business and Legal Affairs, RIAA.

The following witnesses testified on behalf of AFTRA during the direct case

hearings: Greg Hessinger, National Executive Director of AFTRA: Jennifer Warnes,

recording artist; and AFM presented testimony from Harold Bradley, recording artist;

Kevin Dorsey, background vocalist and arranger. AFIM presented testimony from Gary

Himelfarb, Founder, RAS Records.

Webcasters and Broadcasters presented the following witnesses during the direct

case hearings: Professor William Fisher, Harvard Law School; Joe Lyons, Director of
13

New Business Development, Comedy Central; Michael Wise, Chief Financial Officer,

NetRadio; David Pakman, President of Business Development and Public Policy, My

Play; Brad Porteus, Vice President of MTVi Radio and General Manager of Internet

Radio Operations for MTVi.; Rob Reid, Chairman, Listen.com; Quincy McCoy, Vice

President of Radio and Music Programming, MTVi SonicNet; Fred McIntyre, Executive

Director, Business Development, AOL Music, Spinner.com; Dan Halyburton, Senior VP,

General Manager, Group Operations, Susquehanna Radio Corporation; Professor

Michael Mazis, Kogod School of Business, American University; Michael Fine,

Consultant; James P. Donahoe, Senior Vice President, Clear Channel Broadcasting;

Professor Jonathan Zittrain, Harvard Law School; Paul Kempton, Founder and Senior

Partner, Media Matrix Partnership; Adam Jaffe, Professor of Economics, Brandeis

University and Chair of the Department of Economics and the Chair of the University

Intellectual Property Policy Committee; Scott Mills, COO and Executive Vice President,

BET Interactive LLC; David Juris, President and CEO, XACT Radio; Tuhin Roy,

Executive Vice President of Strategic Development, Echo Networks, Inc.; Charles

Moore, Vice President of Business Development, RadioActive Media Partners; Stephen

Fisher, Executive Vice President and Chief Financial Officer, Entercom Communications

Corp.; Dan Mason, President, Infinity Radio; Nathan Pearson, President and CEO,

Radiowave.com; John Jeffrey, Executive Vice President of Corporate Strategy and

General Counsel, Live365 Inc.; and Joe Davis, Senior Vice President for Operations,

Salem Communications.

Webcasters and Broadcasters submitted, but subsequently withdrew written direct

testimony from the following witnesses: David Bean, Vice President of Programming,
14

Music Match, Inc.; Robert Ohlweiler, Senior Vice President of Business Development,

Music Match, Inc.; Diego Ruiz, Vice President and General Manager, Univision Online,

Inc.; Clifton Gardiner, President of Westwind Division, Radio One Networks, Inc.;

Michael Peterson, Senior Vice President, Coollink Broadcast Network; Steven McHale,

Co-Founder, President and Chief Executive Officer, Everstream, Inc.; Eric Snell, Chief

Financial Officer, Incanta, Inc.; Robert D. Roback, President, Co-Founder, and Director,

Launch Media, Inc.; and David Goldberg, Chief Executive Officer, Launch Media, Inc.

See June 25, 2001 Order (Music Choice, Incanta and Everstream); Aug. 3, 2001 Order

(Music Match); Aug. 29, 2001 Order (Univision Online and Westwind); Sept. 14 Order

(Coollink); Tr. 13242-43 (Launch). Webcasters also had submitted written testimony

from Alanis Morisette, a recording artist. By agreement of the parties, the Panel received

that written testimony into evidence without Ms. Morisette presenting oral testimony at

the direct case hearings. See Tr. 9862.

The following witnesses testified on behalf of the Business Establishment

Services: Barry Knittel, President of AEI Music Markets Worldwide, and Doug Talley,

Chief Technical Officer, AEI/DMX. DMX had submitted written testimony from Lon

Troxel, its President and Chief Executive Officer, but that testimony was withdrawn. See

Tr. 6571.

The following witnesses testified on behalf of NPR during the direct case

hearings: Kenneth Stern, Executive Vice President, NPR, and Dr. Jane Murdoch, Vice

President of Charles River Associates.
15

C. THE REBUTTAL CASES

The parties filed written rebuttal cases on October 4, 2001. The Panel conducted

ten days of rebuttal hearings, commencing October 15, 2001 and ending October 25,

2001. A total of 26 witnesses testified.

The following rebuttal witnesses testified on behalf of RIAA during the rebuttal

hearings: Barrie Kessler, Executive Director, Internal Operations and Data Management,

Sound Exchange; Michael Williams, Executive Vice President of Finance and

Operations, RIAA; James McDermott, Senior Vice President, New Technology and

Electronic Music Distribution, Sony Music, U.S.; Lawrence Kenswil, President,

Universal eLabs, Universal Music Group; Dr. Thomas Nagle, Chairman, Strategic

Pricing Group, Inc.; Professor Richard Seltzer, Howard University; Dr. George Schink,

Director LECG, LLC; Steven Marks, Senior Vice President, Business and Legal Affairs,

RIAA; and Professor Steven Wildman, Michigan State University. RIAA had submitted

written rebuttal testimony from Deane Marcus, Senior Vice President, Strategic Planning

& Business Development, Warner Music Group; Carmine Coppola, Vice President and

Chief Financial Officer, Sony Music International; and Prescott Price, Senior Vice

President, Finance, EMI Group. By agreement of the parties, the Panel received that

written testimony into evidence without those witnesses testifying at the rebuttal

hearings. RIAA also submitted written testimony from Mark Ansorge, Vice President

and Associate Counsel, Warner Music Group, Inc., but that testimony was subsequently

withdrawn. See Tr. 13234.

AFTRA and AFM submitted written rebuttal testimony from Greg Hessinger,

National Executive Director of AFTRA.
16

The following witnesses testified during rebuttal on behalf of the Webcasters and

Broadcasters: Cindy Charles, MTVi; Charles Moore, Vice President of Business

Development, RadioActive Media Partners, Inc.; Ronald Gertz, President and CEO,

Music Reports, Inc.; Michael Fine, Consultant; Professor William Fisher, Harvard Law

School; Professor Michael Mazis, Kogod School of Business, American University;

David Fagin, recording artist; Professor Jonathan Zittrain, Harvard Law School; and

Professor Adam Jaffe, Brandeis University.

NPR submitted written rebuttal testimony from Dr. Jane Murdoch, VicePresident, Charles River Associates. By agreement of the parties, the Panel received that

written testimony into evidence without Dr. Murdoch’s testifying at the rebuttal hearings.

See Tr. 12393.

Shortly before the conclusion of the direct case evidentiary hearings, the Panel

invited each of the 26 webcasters who had entered into voluntary agreements with RIAA

to testify during the rebuttal hearings. Seven of the 26 RIAA licensees subsequently

testified during the rebuttal hearings: Bruce Bechtold, President and CEO,

Cybertainment; David Mandelbrot, Vice President and General Manager, Entertainment

Division, Yahoo!, Inc.; Wolfgang Spegg, President and CEO, musicmusicmusic; Scott

Purcell, Founder and CEO, OnAir Streaming Networks, Inc.; John Heilbronn, President,

Cablemusic Networks, Inc.; Matthew Hackett, Founder and CEO, Kickradio.com; Jim

Junkala, President and COO, Multicast Technologies; and Randy Freedman, Counsel,

Multicast Technologies.

Lists of exhibits offered during the direct case and the rebuttal case hearings are

attached hereto as Appendix C and Appendix D, respectively.
17

Hearings in this proceeding were interrupted twice by tragic external events. On

the morning of September 11, 2001, the Library of Congress building in which the

hearing was being conducted was evacuated abruptly by Capital Police; fortunately, the

hearing was able to be resumed the following morning. Subsequently, on October 17,

2001, the rebuttal hearing was again interrupted due to fear of anthrax contamination, and

the proceedings had to be relocated for eight days. The Panel wishes to express its

appreciation and admiration for, and commend the thoughtfulness of, counsel for the

parties and the legal staff of U.S. Copyright Office, whose conduct reflected the highest

degree of consideration and professionalism throughout these difficult periods.

D. THE SUSPENSION OF PROCEEDINGS

On November 8, 2001, the parties jointly moved the Copyright Office to suspend

the CARP proceedings for the period November 9, 2001 through December 2, 2001. The

purpose of the suspension was to permit the parties to engage in settlement negotiations.

By Order dated November 9, 2001, the Copyright Office granted the motion and set

February 20, 2002 as the deadline for the submission of the final CARP Report. The

negotiations resulted in a confidential settlement agreement between NPR (National

Public Radio) and RIAA. The parties also reached an accord respecting all non-rate

terms, excepting one contested issue relating to the designation of an agent to receive and

distribute royalties in the circumstance where a copyright owner has not made a

designation. Pursuant to joint request of the parties, on December 20, 2001, the Panel

issued an order to reopen the record for the limited purpose of admitting into evidence the

agreed-upon terms.
18

E. POST-HEARING SUBMISSIONS AND ARGUMENTS

Following resumption of the proceedings, the parties submitted Proposed

Findings of Fact and Conclusions of Law, Replies thereto, and various other memoranda,

pursuant to schedules established by the Panel. On December 20, 2001 and January 11,

2002, the Panel heard two days of oral arguments presented by counsel for the parties.

F. THE ENORMITY OF THE RECORD

This proceeding has spawned one of the most voluminous records in CARP

history. It includes a written transcript approaching 15,000 pages, many thousands of

pages of exhibits, and over 1000 pages of post-hearing submissions by extraordinarily

able counsel. In these pages, the parties have raised literally hundreds of contentions

relating to statutory construction, economic theory, technology, particulars of their

respective industries, and a host of other subjects. Addressing all of these individual

contentions, and the evidence supporting or contradicting each, would generate a final

report of hundreds, perhaps thousands of pages. Such an endeavor is not required, nor is

it practicable within the time constraints imposed under 37 C.F.R. § 251.53(a).

Accordingly, in this Report the Panel attempts to articulate only the principal

grounds upon which our determinations are based. Of course, in arriving at these

determinations, the Panel has carefully considered all of the parties’ evidence and

arguments. To the extent this Report comports with a particular proposed finding of a

party, we accept that proposed finding. To the extent it does not, we reject that proposed

finding.
19

III. THE STATUTORY CRITERIA FOR SETTING RATES AND TERMS

A. SECTION 114(f)(2)

1. The Statutory Language

The criteria for setting rates and terms for the Section 114 webcaster performance

license are enunciated under 17 U.S.C. § 114(f)(2)(B), which provides in pertinent part:

In establishing rates and terms for transmissions by eligible nonsubscription

services ..., the copyright arbitration royalty panel shall establish rates and

terms that most clearly represent the rates and terms that would have been

negotiated in the marketplace between a willing buyer and a willing seller.

In determining such rates and terms, the copyright arbitration royalty panel

shall base its decision on economic, competitive and programming

information presented by the parties, including –

(i) whether use of the service may substitute for or may promote the

sales of phonorecords or otherwise may interfere with or may enhance the

sound recording copyright owner’s other streams of revenue from its sound

recordings; and

(ii) the relative roles of the copyright owner and the transmitting

entity 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.

The statute further directs the Panel to set “a minimum fee for each type of

service” and grants the Panel discretion to consider the rates and terms for “comparable

types of digital audio transmission services and comparable circumstances under

voluntary license agreements” negotiated under the voluntary negotiation provisions of

the statute. 17 U.S.C. § 114(f)(2)(B).

2. The Relationship of the Statutory Factors to

 the “Willing Buyer/Willing Seller” Standard

The meaning of the “willing buyer/willing seller” standard was the subject of

considerable testimony and argument. Indeed, prior to the hearing, dispute arose

regarding the appropriate relationship between the statutory factors identified in § 114
20

(f)(2)(B)(i) and (ii), and the willing buyer/willing seller standard enunciated in the statute.

In response to the written direct testimony of Services’ witness William Fisher, RIAA

filed a motion for declaratory ruling seeking clarification of the statutory standard. In an

order issued on July 16, 2001, the Librarian ruled as follows:

The statutory standard set forth in section 114(f)(2)(B)

requires the Panel to determine the rates that a willing seller

and a willing buyer would agree upon through voluntary

negotiations in the marketplace. The Panel must use the

“willing seller/willing buyer” standard to set rates for all

non-interactive, nonsubscription transmissions made under

the section 114 license, including those within 150 miles of

the broadcaster’s transmitter.

In making its determination, the arbitrators should consider

the two factors listed in section 114(f)(2)(B)(i) and (ii), but

they should not limit their deliberations to these factors

alone. Neither factor defines the standard for setting the

rates. See, H.R. Rep. No. 105-796, 105th Cong., 2d Sess.

86 (1998) (“The test applicable to establishing rates and

terms is what a willing buyer and willing seller would have

arrived at in marketplace negotiations. In making that

determination, the copyright arbitration royalty panel shall

consider economic, competitive and programming

information presented by the parties including, but not

limited to, the factors set forth in clauses (i) and (ii).”). To

the extent that a party’s testimony is relevant to the analysis

of what a willing buyer/willing seller would accept in the

marketplace, it should be considered.

Order of July 16, 2001 at 5.

For further guidance in setting royalty rates that reflect the “willing buyer/willing

seller” standard, the Librarian referred the Panel to his decision in the satellite rate

adjustment proceeding. See id. In construing parallel language of 17 U.S.C.

§119(c)(3)(D), the Librarian declared that “economic, competitive and programming

information” must be considered by the Panel “if it were relevant to determining fair

market value” but the weight to be accorded each factor depended upon its relative
21

significance to a determination of fair market value. 62 FR 55742, 55746-47 (October

28, 1997).

Accordingly, the willing buyer/willing seller standard is the only standard to be

applied. The two factors enumerated in the statute do not constitute additional standards

or policy considerations. Nor are these factors to be used after determining the willing

buyer/willing seller rate as bases to adjust that determination upward or downward. The

statutory factors are merely factors to be considered, along with any other relevant

factors, in determining rates under the willing buyer/willing seller standard.

3. The Nature of “The Marketplace”

The parties agree that the directive to set rates and terms that “would have been

negotiated” in the marketplace between a willing buyer and a willing seller reflects

Congressional intent for the Panel to attempt to replicate rates and terms that “would have

been negotiated” in a hypothetical marketplace. See e.g., RIAA PFFCL ¶¶ 77-82,

Webcasters PFFCL ¶¶ 17-26. The parties further agree that the “buyers” in this

hypothetical marketplace are the Services (and other similar services) and that this

marketplace is one in which no compulsory license exists. See id. See also

Noncommercial Education Broadcasting Rate Adjustment Proceeding 63 FR 49823,

49835 (September 18, 1998) (“It is difficult to understand how a license negotiated under

the constraints of a compulsory license, where the licensor has no choice but to license,

could truly reflect fair market value.”) But they bitterly dispute the identities of the

“sellers” in this hypothetical marketplace.

RIAA asserts that a single collective of sound recording copyright owners (such

as RIAA), offering a blanket license for sale, must be the appropriate seller in the
22

hypothetical marketplace we seek to replicate. See RIAA PFFCL ¶ 94. Consequently,

RIAA argues that the 26 voluntary agreements it recently negotiated with various

webcaster licensees, pursuant to Section 114(f)(2)(A), would serve as perfect

benchmarks. See RIAA PFFCL (Introduction at 1).

The Services’ perception of the sellers, in the hypothetical marketplace envisaged

by Congress, is starkly different. They assert that RIAA’s vision “would eviscerate the

protections sought by the Justice Department and implemented by Congress to prevent

the exercise of market power [by the RIAA or the record companies].” Webcasters

PFFCL ¶ 26. By contrast, the Services seem to envisiona theoretical world of perfect

competition. Accordingly, they press the notion of a theoretical “competitive market”

where the sellers consist of a “non-trivial number” of collectives (essentially, multiple

RIAAs) in competition with each other, with each offering a blanket license consisting of

all copyrighted sound recordings.10 Tr. 11667-69 (Fisher); Tr. 6431, 6659, 6603-05,

12704 (Jaffe). See also Webcasters PFFCL ¶¶ 20-26.

The Panel rejects the Services’ view. We recognize that an antitrust exemption

was required to enable RIAA to act as a non-exclusive, common agent in negotiating

agreements under the statutory license at issue here. In the absence of a compulsory

license, even if the designation of the single common agent were non-exclusive,

extraordinary market power would be concentrated in that single entity. However, in the

hypothetical marketplace, where no compulsory license would exist, RIAA would not

enjoy such an exemption and services would necessarily negotiate directly with the

record companies. Indeed, numerous internet services, which were not eligible for

 

10 In support of this theory, the Services cite ASCAP v. Showtime/The Movie Channel, Inc., 912

F.2d 563 (2d Cir. 1990).
23

statutory licenses, and at least one that was eligible xxxxxxxxxxxx, did reach agreements

with individual record companies.11 See e.g., RIAA PFFCL ¶¶ 167-69, Appendix A. See

also xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

Moreover, we see no Copyright Office or Copyright Royalty Tribunal precedent

for the Services’ “competitive market” construct in the compulsory license context.

Perhaps upon a showing that the record companies themselves, or even the majors, could

exert oligopolistic power, we would be tempted to import the ASCAP v. Showtime (see

n.10 supra) concept of multiple licensing collectives, each selling the same product.

However, no record evidence supports this proposition. 12 Finally, it is difficult to

imagine the practicality of competing licensing collectives each offering full blanket

licenses, and the Services could offer no example of such circumstances existing in the

real world. See Tr. 6612 (Jaffe).

Neither, however, can the Panel fully adopt the RIAA stance. We recognize that

the hypothetical marketplace we seek to replicate would operate more efficiently, with

lower transactional costs, if a single collective designated by the services could negotiate

with a single collective designated by the record companies. Even if such designations

were non-exclusive, Congress clearly perceived antitrust concerns with such an

arrangement. Congress authorized antitrust exemptions respecting such negotiations only

within the context of the compulsory licenses. See 17 U.S.C. § 114(e). See also

Webcasters PFFCL ¶ 21, n.7, 8. Consequently, the record companies could not designate

 

11 Of course, the existence of a single negotiated agreement between one DMCA compliant

service and one record company does not establish that non-exclusivity alone would provide

adequate protection from RIAA market power. See discussion of “non-exclusivity” infra.

12 Indeed, contrary record evidence was adduced. See Tr. 8978-83 (Murdoch) (sound recording

marketplace is a competitive marketplace).
24

a single negotiation agent for non-statutory licenses, whether non-exclusive or not.

RIAA’s reliance upon the DPRA Senate Report (see RIAA RPFFCL ¶ 19, n.30) is

misplaced. The Report does state that non-exclusivity “should help” prevent RIAA from

demanding supra-competitive rates but, again, only in the context of the compulsory

license where RIAA can not withhold use of the copyrighted works. Id. Accordingly, in

the hypothetical marketplace, where no compulsory license would exist to provide true

protection, we do not perceive the hypothetical seller to be RIAA. The appropriate

sellers would be the individual record companies.

Thus, the Panel perceives the Section 114(f)(2) hypothetical marketplace as one

where the buyers are DMCA-eligible (also referred to as “DMCA-compliant”) services,

the sellers are record companies, and the product being sold consists of blanket licenses

for each record company’s repertory of sound recordings.

4. The Appropriate Willing Buyer/Willing Seller Rate

As noted, the statute directs us to “establish rates and terms that most clearly

represent the rates and terms that would have been negotiated in the marketplace.” 17

U.S.C. § 114(f)(2)(B) (emphasis added). 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.

Moreover, these parties would be negotiating rates for newly created property rights with

no established pricing history.

One would, therefore, expect negotiations between diverse buyers and sellers to

generate not a uniform rate, but a range of negotiated rates reflecting the particular

circumstance of each negotiation. See, e.g., Tr. 2618-20 (Nagle). Congress surely
25

understood this when formulating the willing buyer/willing seller standard. Accordingly,

the Panel construes the statutory reference to rates that “most clearly represent the

rates...that would have been negotiated in the marketplace” as the rates to which, absent

special circumstances, most willing buyers and willing sellers would agree.

B. SECTION 112(e)

The criteria for setting rates and terms for the Section 112 ephemeral licenses are

enunciated under 17 U.S.C. § 112(e)(4), which provides in pertinent part:

The copyright arbitration royalty panel shall establish rates that most clearly

represent the fees that would have been negotiated in the marketplace

between a willing buyer and a willing seller. In determining such rates and

terms, the copyright arbitration royalty panel shall base its decision on

economic, competitive, and programming information presented by the

parties, including –

(A) whether use of the service may substitute for or may promote

the sales of phonorecords or otherwise interferes with or enhances the

copyright owner’s traditional streams of revenue; and

(B) 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.

As does Section 114, this section further directs the Panel to set “a minimum fee

for each type of service.” 17 U.S.C.§112(e)(4). Although Section 112 does not explicitly

grant the Panel discretion to consider the rates and terms for comparable types of

services, it does explicitly grant discretion to “consider the rates and terms under

voluntary license agreements” negotiated under the provisions of the statute. 17 U.S.C. §

112(e)(4).

Accordingly, while the language of the two sections varies in minor respects, the

Panel interprets the criteria for setting rates and terms as essentially identical. See Order

of July 16, 2001 at 5.
26

IV. RATE PROPOSALS OF THE PARTIES FOR WEBCASTING SERVICES

A. RIAA RATE PROPOSALS

The RIAA approach is simple and straightforward. It offers as a benchmark the

agreements reached between the RIAA and 26 separate webcasters which, RIAA alleges,

represent a broad range of webcaster business models and comparable circumstances. See

RIAA PFFCL (Introduction at 7-9). RIAA asserts that these agreements, negotiated

during the statutorily prescribed period for voluntary negotiations, see 63 Fed. Reg.

65555 (November 27, 1998), 65 Fed. Reg. 2194 (January 13, 2000), “involve the same

buyer, the same seller, the same right, the same copyrighted works, the same time period

and the same medium as those in the marketplace that the CARP must replicate.”13 RIAA

PFFCL (Introduction at 8) (emphasis in original). RIAA further asserts that the rates and

terms established by these 26 agreements are corroborated by substantial evidence of

record including, inter alia, the following:

 (i) Approximately 115 agreements between individual record companies and

similar services;14

(ii) An analysis of intellectual property values under the criteria set forth in the

Georgia Pacific patent infringement case; and

 

13 With the exception of the “same seller,” the Panel concurs with this litany. As discussed supra,

in the hypothetical marketplace, we view the seller as not a single monopolistic collective, but

rather the individual record companies. However, this distinction is rather minor because the

RIAA conducted its negotiations under circumstances where it could not exert monopolistic

power. The 26 agreements were all negotiated in “the shadow” of the compulsory license.

Hence, RIAA could not deny use of the copyrighted work to any service that simply filed the

appropriate notice pursuant to Section 114(f)(4)(B)(i). See 64 Fed. Reg. 50758 (September 20,

1999).

14 Excepting one agreement with xxxxxxxxxxx these agreements involved licenses for different

rights granted to non-DMCA compliant services. See RIAA PFFCL ¶¶ 167-69, Appendix A. See

also xxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
27

(iii) An “economic value” estimation.

See Id. at 9.

Based upon these agreements, RIAA proposes the following rates for DMCA

compliant webcasting services:

(a) For basic “business to consumer” (B2C) webcasting services, either 0.4¢ for

each transmission of a sound recording to a single listener, or 15% of the service’s gross

revenues;

(b) For “business to business” (B2B) webcasting services, where transmissions

are made as part of a service that is syndicated to third-party web sites, 0.5¢ for each

transmission of a sound recording to a single listener; and

(c) For “listener-influenced” webcasting services,15 where the transmissions are

partly influenced by the listener, 0.6¢ for each transmission of a sound recording to a

single listener. See RIAA PFFCL (Appendix C) for a more detailed description of

proposed rates and qualifications.

RIAA further proposes a minimum fee, subject to certain qualifications, of $5,000

per webcasting service and a Section 112(e)(1) ephemeral license fee of 10% of each

service’s performance royalty payable under (a), (b), or (c) supra. See id. at 3-4.

B. WEBCASTER RATE PROPOSALS

Unlike the RIAA proposals, which are grounded in actual marketplace

agreements, the Webcasters proposals are derived from a theoretical economic model.

 

15 It should be noted that RIAA believes that such services are not DMCA-compliant and,

accordingly, not eligible for the Section 114(f)(2) statutory license. See RIAA PFFCL (Appendix

C, n.1). RIAA sets forth this proposal only in the event the Panel determines to set a royalty for

such services.
28

The Webcasters’ model is fundamentally premised upon the notion that, in the

hypothetical marketplace we seek to replicate, copyright owners16 would license their

sound recording digital performance rights and ephemeral reproduction rights to

webcasters at a rate no higher than the rates at which music publishers (through the

PROs) have licensed their musical work analog performance rights to over-the-air radio

broadcasters. See Webcasters PFFCL ¶¶ 276-78; Jaffe W.D.T. 16-19. Accordingly,

Webcasters calculated their proposed per-performance and per-hour sound recording

performance fee by extrapolation from the aggregate fees paid to ASCAP, BMI, and

SESAC by over-the-air radio stations holding blanket performance licenses. Specifically,

Webcasters utilized year 2000 data from 872 radio stations (those stations for which their

expert was able to obtain relevant data), which they claim constitutes “a significant

portion” of the total fees paid to the PROs in 2000. Webcasters PFFCL ¶ 276. See also

Jaffe W.D.T. 25-32. By combining this fee data with data on the Arbitron “ratings” or

listening audience of these stations, Webcasters converted the over-the-air music stations’

fees paid to the PROs into an average fee paid by an over-the-air broadcaster per

“listening hour.” See Jaffe W.D.T. (Appendix B).

Based upon data from Broadcast Data Systems, Webcasters also calculated a fee

per listener song by dividing the “listener hour” fee by the average number of songs

played per hour by music-intensive format stations. This calculation produced a fee per

song and fee per listener hour for the performance of musical works by the over-the-air

radio stations of 0.02¢ per song and 0.22¢ per hour, respectively. See Jaffe W.R.T. 29-30,

 

16 As discussed supra, Webcasters believe the copyright owners would be selling their rights

through multiple, competing collectives, but the Panel rejects this view. We find that the Section

114 and Section 112 copyright sellers would be the record companies.
29

Figure 3. However, because, on average, webcasters play 15 songs per hour, compared

to the 11 per hour played on over-the-air radio, the per-hour rate was adjusted to 0.3¢ per

hour. See Webcaster PFFCL ¶ 277. We note, however, that the 0.3¢ figure is not derived

by simply multiplying 0.2¢ by 15, as Webcasters suggest. See id. Rather, we presume,

Professor Jaffe formulated a mathematical proportion and performed the following

calculation: 11X = (15)(.22); therefore, X = 0.3¢.

Webcasters assert that the 0.02¢ per song and 0.3¢ per hour benchmarks should

be adjusted downward for a variety of factors, but offer quantification for only one factor

– difference in promotional value. See Jaffe W.D.T. 34-43, Tr. 6517-34 (Jaffe).

Webcasters note that radio play unquestionably promotes the sale of record albums.

However, sound recording copyright owners receive a greater benefit from the sale of

phonorecords than do copyright owners of the underlying musical works. See Jaffe

W.D.T. 37-38; Tr. 6525 (Jaffe). As discussed supra, musical works copyright owners

receive payment for each sale of a phonorecord via licensing of their “mechanical” rights.

However, the amount of remuneration is set by statute. See Jaffe W.D.T. 44-45; Tr. 6526

(Jaffe). By contrast, the profits that sound recording owners command from sales of their

phonorecords are under no legal restraints. See Jaffe W.D.T. 46-47. If, as Webcasters

assume, the value of the sound recording digital performance right is worth no more than

the musical work analog performance right, Webcasters argue that the total remuneration

received by each of the copyright owners derived from performances should be equal.

See Jaffe W.D.T. 45-46. Webcasters accordingly argue that, if royalties paid to musical

works copyright owners are to be used as a benchmark for royalties that should be paid to

sound recording copyright owners, an adjustment is required to account for the greater
30

promotional benefits received by the sound recording owners relative to the musical work

owners.17 See Jaffe W.D.T. 44-47.

To determine the appropriate adjustment, Webcasters assumed that 27% of all

record album sales were directly attributable to record play on the radio.18 See Jaffe

W.D.T. 44. Webcasters then calculated the promotional value discount that reflects the

difference in the total remuneration derived by sound recording owners and musical work

owners from the sale of record albums promoted by over-the-air radio. See id. at 47;

Webcasters PFFCL ¶ 293, n.124. This calculation implied that a sound recording royalty

for over-the-air radio performances should be 52% of the estimated musical works

royalty. See id. However, to be “conservative,” Webcasters applied a discount of only

30% -- i.e., they propose a Section 114(f)(2) royalty fee for sound recording digital

performances that is 70% of the musical works analog performance benchmark royalty

that they estimated. See Jaffe W.D.T. 48; Webcasters PFFCL ¶ 295; Tr. 6534 (Jaffe).

Applying this discount to Webcasters per-performance benchmark of 0.02¢ and their per

hour benchmark of 0.3¢, yields a proposed per-performance fee of .014¢ and a per-hour

fee of 0.21¢.

 

17 This, of course, assumes that these collateral benefits were, and would be, considered by the

relevant parties in the negotiation of appropriate royalties for the respective rights. No persuasive

evidence supporting this proposition was adduced.

18 This assumption is also suspect. The Soundscan survey, upon which Webcasters rely, reflected

only that 27% of the respondents identified “heard on radio” as what most influenced them to

purchase record albums. See Fine W.D.T. ¶ 14. This does not necessarily imply that record sales

increased 27% solely due to radio play.
31

In their PFFCL, Webcasters, for the first time in this proceeding,19 propose an

alternative royalty metric – a percentage-of-revenue fee structure, provided that each

webcasting service could elect which fee structure to utilize. See Webcasters PFFCL ¶¶

275, 283, 296. Webcasters propose a fee of 3% of a webcaster’s gross revenues,20 which

they assert “is taken straight from the ASCAP/BMI/SESAC broadcast radio licenses.”

Webcasters PFFCL ¶ 283. Webcasters assert that “the PROs collectively receive

approximately 3 percent of broadcast radio music station revenues directly attributable to

over-the air radio.” Id. With respect to this percentage of revenue fee structure,

Webcasters apply no downward adjustment because “it is an alternative to be elected at

the Webcaster’s option.” Id. at 296.

With respect to “business to business” syndicators and to “listener-influenced”

webcasting services, Webcasters propose the same rates as proposed for basic webcasting

services. See id. at 297-305. They argue inter alia that “[r]egardless of the type of

service, the nature of the public performance is the same; and the value of the

performance does not change merely because of the technology of the webcaster or the

fact that the sound recording is heard when it is accessed at a third-party web site

[syndicated] rather than the originating webcaster’s site.” Id. at 297.

Webcasters propose no additional royalty fees for the making of ephemeral

copies under Section 112(e) because “[s]uch copies have no economic value separate or

 

19 This proposal is surprising because heretofore Webcasters repeatedly asserted that a percentage

of revenue metric is inappropriate. See e.g., Jaffe W.D.T. 22; Tr. 4317-18 (determining the

relevant revenues associated with Section 114 webcasting would “create[ ] enormous potential

measurement problems.”) Moreover, this proposal is untimely. See Order of November 3, 2001

(to which no party objected).

20 Webcasters set forth their definition of “gross revenues” at Webcasters RPFFCL ¶¶ 64-65.
32

distinct from the value of the public performances they effectuate.” Id. at 354.

Respecting minimum fees, Webcasters assert that the only justification for imposing a

minimum fee is to protect against a situation in which the licensee’s performances are

such that it costs the license administrator more to administer the license than it would

receive in royalties. See Jaffe W.R.T. 31; Tr. 12387 (Jaffe). This is particularly true

under the per-performance fee structure, which presumably provides the appropriate level

of compensation for each use of the copyrighted work. Id. Moreover, Webcasters assert

that the appropriate calibration for the minimum fee is the incremental costs to the license

administrator of adding another license to the system regardless of how many

performances they make. See Jaffe W.R.T. 32; Tr. 12388 (Jaffe). Accordingly, based

upon the minimum fees allegedly charged by the PROs, Webcasters propose a minimum

fee of $250 per annum. See Webcasters RPFFCL ¶ 163.

V. THE PANEL’S DETERMINATION OF ROYALTY RATES

 FOR WEBCASTER AND BROADCASTER SERVICES

A. APPLICATION OF THE SECTION 114(f)(2) AND

 SECTION 112(e) STATUTORY FACTORS

1. Section 114

Section 114(f)(2) directs the Panel to base its decision on information presented

by the parties, including:

(i) whether use of the service may substitute for or may promote the

sales of phonorecords or otherwise may interfere with or enhance the sound

recording copyright owner’s other streams of revenue from its sound

recordings; and

(ii) the relative roles of the copyright owner and the transmitting

entity 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.
33

17 U.S.C. §114(f)(2)(B)

As we previously noted, these two factors do not represent additional criteria.

They are merely factors to consider, along with any other relevant factors, in setting rates

under the willing buyer/willing seller standard. See Order of July 16, 2001 at 5. The

weight to be accorded each factor, if any, depends upon its relative significance to a

determination of fair market value. See id citing Satellite Rate Adjustment Proceeding 62

FR 55742, 55746 (October 28, 1997).

As to the first factor (impact on sales), we cannot conclude with any confidence

whether any webcasting service causes a net substitution or net promotion of the sales of

phonorecords, or in any way significantly affects the copyright owners’ revenue streams.

The evidence adduced by RIAA on this issue, consisting entirely of anecdotes and

unsupported opinion testimony, is unconvincing. (See generally RIAA PFFCL ¶¶ 124-39,

436-53.) Indeed, RIAA did not attempt to offer any empirical evidence to support its

“concerns” that webcasting causes a net substitution of phonorecord sales. Id.

Webcasters also failed to present any compelling evidence. In addition to a

plethora of similarly unsupported opinion evidence (see e.g., Webcasters PFFCL ¶¶ 311,

315-19, 322), they produced some unpersuasive empirical evidence (see generally RIAA

PFFCL ¶¶ 454-85) to support their claim that webcasting actually causes a net promotion

of phonorecord sales.

For example, the Soundata survey presented by Mr. Fine evinced a net

promotional effect of radio broadcasts, but said little about the net promotional effect of

the internet -- and nothing about any net promotional effect of webcasting. See Fine

W.D.T. 6-8. The study conducted by Professor Mazis suggested that the impact was, at
34

best, minimally promotional. Over 80% of the respondents who listened to radio

retransmissions indicated that listening did not affect their overall music purchases and

another 9% were not sure; similarly, over 70% of the respondents who listened to

internet-only streaming reported that listening did not affect their overall music purchases

and another 5% were not sure. See RIAA Exhibit 102 RP (Tables 29 & 52); Tr. 5555-56

(Mazis). Moreover, the extremely low response rate raises additional questions about the

survey. The 47% adult response rate and the 19% teen response rate21 fall below

generally accepted standards. See Tr. 12027-30 (Seltzer). Indeed, Dr. Seltzer’s critique

of the Fine and Mazis studies, while not flawless itself, nevertheless substantially

undermines the reliability of the conclusions offered by these two witnesses.

After weighing the credibility of the various conflicting witnesses and assessing

the strength of the proffered empirical evidence, the Panel concludes that, for the time

period this CARP is addressing, the net impact of internet webcasting on record sales is

indeterminate. In any event, as explained earlier (see discussion in Section III.A.2,

supra), to the extent those factors influence rates that willing buyers and willing sellers

would agree to, they will be reflected in the agreements that result from those

negotiations.22

 

21 In fact, of the 757 teen respondents, 347 were directed to answer questions about webcasting.

See Mazis W.D.T. 5-6; Mazis W.R.T. 2; RIAA Exhibit 102 RP (Tables 3, 40 & 63).

Accordingly, the results presented by Professor Mazis reflect less than 9% of the 4000 teen panel

members who were invited to participate in the survey.

22 By contrast, it would be necessary to adjust theoretical models, such as the Jaffe formulation,

that borrowed data from another marketplace. With a theoretical model, these factors would not

already have been accounted for by the negotiating parties. In addition, the setting of prospective

statutory rates could be affected by record evidence that clearly established that parties to

agreements had misperceived relevant economic realities at the time of their negotiation. For

example, if comparable marketplace agreements (used to set a rate for one period) were

negotiated on the mutual assumption that webcasting caused a net decline in record sales, but the

hearing record proved conclusively that it actually caused a net increase in sales, then the Panel’s
35

Regarding the second factor (the relative creative, technological, and financial

contributions of copyright owners and transmitters), we also find no persuasive evidence

militating in favor of either copyright owners or services. See generally RIAA PFFCL ¶¶

486-98; Webcasters PFFCL ¶¶ 333-52. Clearly, the streaming industry has made

meaningful contributions and incurred significant costs and risks in connection with the

services it offers to the public. Similarly, copyright owners have made meaningful

contributions and incurred significant costs and risks in connection with the creation of

their copyrighted recordings.

Again, we would expect these considerations to be fully reflected in any

agreements actually negotiated between webcasters and copyright owners in the relevant

marketplace. Accordingly, if such agreements exist, absent unusual circumstances, no

rate adjustment would be required to determine willing buyer/willing seller rates.

Relative contributions, costs, and risks would already be subsumed within the negotiated

rates.

2. Section 112

Section 112(e) similarly directs the Panel to base its decision in part on

information presented by the parties regarding these same two factors, specifically:

i. whether use of the service may substitute for or may promote

the sales of phonorecords or otherwise interferes with or

enhances the copyright owner’s traditional streams of

revenue; and

ii. 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

 

rate-setting for subsequent periods should reflect the reduction in royalty rates which this newlyestablished conclusion would naturally bring about in marketplace pricing.
36

creative contribution, technological contribution, capital

investment, cost, and risk.

17 U.S.C. §112(e)(4).

Again, we find no persuasive evidence militating in favor of either copyright

owners or streaming services.23 And again, if agreements actually negotiated between

webcasters and copyright owners in the relevant Section 114 marketplace can be

observed, these considerations should already be subsumed in the rates negotiated by the

parties.

B. PER-PERFORMANCE IS THE PREFERRED ROYALTY METRIC

At the outset of its analysis, the Panel must consider two foundational questions.

The first relates to the type of metric to be adopted for the royalty rate. The second is

whether rate determinations are best derived from theoretical economic analyses or from

any of the licensing agreements in the record before us. We address each of these matters

in turn.

Regarding the choice of a metric, we note that initially RIAA proposed a

percentage-of-revenue option, but by the conclusion of the proceeding, it urged that only

a per-performance model be adopted. See RIAA Comments Concerning Definitions of

Gross Revenues and Performance at 2 (Jan. 18, 2002). A similar evolution in perspective

on this issue occurred over the course of RIAA negotiations with the 26 licenses.

Initially, RIAA negotiated two percentage-of-revenue agreements with licensees. RIAA

 

23 A considerable amount of the hearing record consists of detailed testimony and exhibits

concerning the economics of the recording, music publishing, broadcasting, and webcasting

industries; how various streaming services operate; and the technology of the internet. While

valuable as general background information, the Panel does not find that this evidence materially

aids our determination of what royalty rates willing buyers and willing sellers would actually

agree to for the licenses at issue.
37

Exs. xxxxxxxxxxxxxxx Soon, however, RIAA determined that per-performance licenses

were more advantageous (see Tr. 9203 (Marks)), and it began to offer licenses on a perperformance basis. Thereafter, it reached per-performance agreements with a number of

licensees. See, e.g., RIAA Exs. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

From the evidence of record, the Panel concludes that three factors militate in

favor of the per-performance approach. First, in reality, revenue merely serves as “a

proxy” for what is truly being licensed. Jaffe W.D.T. 22. By contrast, a per-performance

metric “is directly tied to the nature of the right being licensed.” Id. The more intensively

an individual service uses the rights being licensed, the more that service shall pay, and in

direct proportion to the usage. See id. at 21. And unlike a per-hour fee structure, perperformance models appropriately capture partial performances resulting from a “skip

song” feature. See RIAA RPFFCL ¶ 189.

Second, percentage -of-revenue models are difficult to utilize because identifying

the relevant webcaster revenues can be complex, particularly where the webcaster offers

features unrelated to music. A given percentage rate can produce widely variant royalties

depending upon the revenue base against which it is applied. See Marks W.D.T. 7; Jaffe

W.D.T. 22; Tr. 9138-39, 9201-03 (Marks); Tr. 4317-18 (Jaffe).

 Third, because many webcasters are currently generating very little revenue, use

of a percentage-of-revenue royalty for the statutory licenses at question could result in a

situation in which copyright owners are forced to allow extensive use of their property

with little or no compensation. This potentiality was something Congress specifically

cautioned against in enacting DMCA. See DMCA Conference Report 85-86.
38

For these reasons, the Panel concludes that, where feasible to utilize, a perperformance fee metric is highly preferable to a percentage-of-revenue structure or to a

per-hour fee structure, if such a rate can be reliably derived from the evidence of record.

C. A THEORETICAL ECONOMIC MODEL

 VERSUS NEGOTIATED AGREEMENTS

The second foundational issue relates to the type of evidence that can most

reliably be used for deriving the royalty rates we must determine in this proceeding. On

this issue, the two sides present starkly different viewpoints. RIAA argues that the best

available evidence of the rate which willing buyers and willing sellers would agree to can

be found in the 26 agreements it actually negotiated with licensees for the rights in

question. The Services, on the other hand, contend that these agreements are fatally

tainted in numerous respects and that willing buyer/willing seller rates are best derived

from the thoughtful, theoretical model developed and explicated by Dr. Adam Jaffe, a

distinguished economist. In essence, the parties ask us to choose between theory and

practice, with each side pointing out numerous alleged flaws in the opposing party’s

presentation.

1. The Shortcomings of the Theoretical Model

Preliminarily, we recognize that rate-setting based upon theoretical market

projections is a difficult endeavor. See e.g., National Ass'n of Broadcasters v. Librarian

of Congress, 146 F.3d 907 (D.C. Cir. 1998). This is true in part because it is virtually

impossible for a theoretician to identify all of the factors that might influence the

structure of a market and the manner in which these factors will interact to establish rates.

The complexity of real world markets makes predicting market rates highly susceptible to
39

error. See Wildman W.D.T. 15. Real world participants in an actual marketplace

discover relevant market-influencing factors as they negotiate deals, and these factors are

reflected in the ultimate agreements reached. See id. Actual agreements contain

embedded information that cannot be captured fully in the projections and estimates of

theoretical analysts. See Tr. 3369-71 (Wildman). Factors that the analyst suspects might

influence hypothetical negotiations should be subsumed and reflected in actual negotiated

agreements, but the theorist’s capacity for perfect projection is subject to the inherent

limits of human fallibility. See id.

Moreover, theoretical models are necessarily based upon a series of logical

assumptions and analogies. Each assumption or analogy inevitably involves some degree

of uncertaintyor inexactitude. The cumulative impact of a string of such assumptions

may produce a model which differs substantially from real world experience. In this

case, for example, the analysis offered by Professor Jaffe relies upon at least a dozen

assumptions, as enumerated below:

(1) that different technologies (analog vs. digital) are analogous;

(2) that different sellers (PROs vs. record companies) are analogous;

(3) that different buyers (established over-the-air broadcasters vs. internet

 entrepreneurs) are analogous;

(4) that different copyrights (musical works vs. sound recordings) are

 analogous;

(5) that different delivery systems (over-the-air, where cost/listener remains

 constant vs. internet, where broadband cost/listener increases) are analogous;

(6) that different cost structures (individual song writers vs. integrated

 creative/production/marketing corporate entities) are analogous;

(7) that different demand structures (a finite universe of performing artists vs.

 the mass record-buying public) can be analogized;
40

(8) that infant and mature industries behave similarly;

(9) that different royalty metrics (percentage-of-revenue vs. per-

 performance) can be accurately converted from one to another;

(10) that “listener hours” can be accurately converted into “listener songs;”

(11) that an end-product number (a dollar volume amount) from one market can

 form the basis for a backward calculation to a different metric in a different

 market; and

(12) that a promotional impact in one industry (radio broadcasting) can be

 reliably quantified and then used as a rate reduction adjustment for a

 different industry (webcasting).

The Panel is uncomfortable with many of these assumptions and the cumulative

effect casts significant doubt on the reliability of the ultimate conclusions. The Panel

finds that this theoretical construct suffers serious deficiencies. Two examples are

addressed below.

2. The Model is Based upon a Different Market

As discussed above, the webcasters’ rate model is premised upon the fundamental

assumption that in the Section 114(f)(2) hypothetical marketplace, copyright owners

would license their internet sound recording performance rights to webcasters at a rate no

higher than the rates at which music publishers (through the PROs) have licensed their

musical work analog performance rights to over-the-air radio broadcasters. See Section

IV.B. supra. Accordingly, Professor Jaffe calculated proposed performance fees by

extrapolation from a large sample of aggregate fees paid to ASCAP, BMI, and SESAC by

over-the-air radio stations holding blanket performance licenses.
41

This analysis by necessity engrafts concepts and presumptions from one

marketplace onto another. Dr. Jaffe’s model is thus based upon different buyers and

different sellers, selling different rights from those at issue in this proceeding.

The Panel agrees with RIAA that the market for the performance of musical

works is distinct from the market for the performance of sound recordings. Musical

works and sound recordings do not compete in the same market, and they have different

cost and demand characteristics. See generally RIAA PFFCL ¶¶ 523-35. Moreover, the

Panel rejects Dr. Jaffe’s premise that the value of performance rights in sound recordings

are necessarily no greater than in musical works because costs are “sunk.” See id at ¶

552-67. This view assumes (erroneously, in our view) that sound recording owners have

a static perspective and do not consider the costs of developing new sound recordings

when negotiating fees. See Schink W.R.T. 6-7; Tr. 13576-78, 13584-89 (Schink).

As to the precise relative value of performance rights in sound recordings vis-àvis musical works, we render no opinion. However, in determining the prices to which

willing buyers and willing sellers would agree, the “true” relative value -- even if that

could be precisely ascertained -- is less important than the parties’ perception of that

relative value. Thus, Professor Jaffe’s theoretical calculations are far less powerful

evidence in this regard than, for example, David Madelbrot’s repeated testimony that one

of the factors which led Yahoo! to sign the RIAA agreement was Yahoo!’s belief that the

sound recording royalty rates in that agreement were “xxxxxxxxxxxxxx” of what Yahoo!

paid to the PROs for musical works royalties. Tr. 11250, 11270, 11287-89 (Mandelbrot).

In addition, many of the webcasters’ arguments in support of Professor Jaffe’s

conclusions have significant limitations. See generally RIAA PFFCL ¶¶ 578-89 (“master
42

use” and “synch” rights), 590-93 (statutory allocation), 610-21 (international evidence).

And Webcasters can take no comfort in the prior Subscription Services Rate Proceeding,

in which the Register simply found that neither side had produced compelling evidence

of relative value. See 63 Fed. Reg. 25394, 25404 (1998). See also Order of July 18, 2001

at 2.

3. The Conversion from Percentage of Revenues

Regarding this issue, the Panel again agrees with RIAA that converting a rate

from the metric in which it was negotiated into another metric to be used as a benchmark

is usually a risky undertaking. See RIAA PFFCL ¶¶ 597-600; cf. ASCAP v. Showtime,

912 F.2d 563 at 579 (magistrate’s opinion). Indeed, the listener-hour conversions

calculated by Professor Jaffe bear little resemblance to the blanket license fees actually

paid by some individual radio stations. See e.g., RIAA PFFCL 602-04. For example,

during the year 2000, one specific station which was analyzed actually paid four times

the amount of fees to the PROs that Professor Jaffe’s conversion calculation had

predicted. Moreover, even if the conversion were mathematically correct, real world

considerations may drive marketplace players to utilize one metric and strongly resist

another. See Schink W.R.T. 6-7; Tr. 13541-53, 13650-69, 13676-78 (Schink).

Given the uncertainty inherent in any theoretical model and our numerous

significant concerns regarding the limitations of this specific webcaster analysis, the

Panel next examines whether the record before us affords better evidence.
43

D. COMPARABLE AGREEMENTS ARE THE BEST BENCHMARK

The Panel believes that the quest to derive rates which would have been

negotiated in the hypothetical willing buyer/willing seller marketplace is best based on a

review of actual marketplace agreements, if they involve comparable rights and

comparable circumstances. This belief is buttressed by two factors.

The first is statutory. Both Sections 114 and 112 explicitly invite the Panel to

consider the rates and terms negotiated under voluntary license agreements. See 17

U.S.C. §§ 114(f)(2)(B), 112(e)(4). Section 114 further invites the Panel to consider other

agreements negotiated by comparable digital audio transmission services under

comparable circumstances. See 17 U.S.C. § 114(f)(2)(B). Second, because as noted

above, it is extraordinarily difficult to predict marketplace results from purely theoretical

premises, it is clearly safer to rely upon the outcomes of actual negotiations than upon

academic predictions of rates those negotiations might produce. See Tr. 3369-71

(Wildman).

Indeed, as Professor Jaffe himself testified, comparable marketplace agreements,

if available, provide the best evidence of the prices to which willing buyers and willing

sellers actually agree. Tr. 6618 (Jaffe) (“If you had available agreements that you believe

represent reasonable rates for users that are comparable to the users being licensed by the

proceeding, I think that would have been the best thing to do.”). Accord, Tr. 13675

(Schink) (The best evidence for determining fair market rates is agreements actually

negotiated in the marketplace). The Panel’s next task, therefore, is to consider whether

any of the agreements before us constitute such comparable agreements.
44

E. THE xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx LICENSE

AGREEMENT_________________________________

We concluded above that the Section 114(f)(2) hypothetical marketplace is one

where the buyers are DMCA-compliant services, the sellers are record companies, and

the product being sold consists of blanket licenses for each record company’s repertory of

sound recordings. Accordingly, the most reliable benchmark rate would be established

through license agreements negotiated between these same parties for the rights

described. Unfortunately, the record contains only one agreement that appears to meet all

three of these parameters, namely, the agreement between xxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxx. See xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxx, testified that xxxxxxxxxxx was a fully DMCA-compliant service.24 See Tr. xxxx;

xxxxxxxxxxxxxx The agreement provided for a royalty rate of xxxx per performance25

with xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Regrettably, while directly on point,

this agreement can be accorded little weight because it was never implemented, and

 

24 Curiously, the license agreement requires compliance with Section 114(d)(2)(C)(i) (the

performance complement requirements) but it is silent as to compliance with Section

114(d)(2)(A) (the non-interactivity requirement).

25 The agreement is silent respecting any ephemeral royalties under Section 112(e). See RIAA

Exhibit xxxxx. This could be interpreted to mean either that (1) the xxxxx per performance fee

included the making of ephemeral copies incident to the transmissions or (2) an unspecified

additional fee could be due under Section 112(e). The agreement specifies that the Licensee is

not granted xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxx Id. at 3. It further provides that the agreement xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx and provides examples, none of which relate to making

ephemeral copies. Although it is difficult to imagine that the parties intended additional, but

unspecified, fees to be paid (or that the making of ephemeral copies would be unnecessary), in

light of this unambiguous language, we cannot assume that the intended rate for making

ephemeral copies was zero. See generally discussion of ephemeral royalties in Section V.N. infra.
45

xxxxxxxxxx therefore never paid any royalties under it. Rather, xxxxxxxxxx outsourced

its streaming to a third party, whichapparently deemed the agreed rate too high and

elected instead to avail itself of the compulsory license rate set in this proceeding. See

RIAA’s Reply of October 24, 2001 to the Order of October 2, 2001. On balance, since no

royalties were ever paid pursuant to its provisions, we conclude that this agreement is of

virtually no use as a rate benchmark. See discussion in Section V.G.2. infra.

F. THE 26 RIAA LICENSE AGREEMENTS CONSTITUTE

 THE NEXT CLOSEST APPROXIMATION

 OF THE HYPOTHETICAL MARKETPLACE

The 26 agreements between RIAA and various services were the product of a

marketplace with many characteristics similar to the hypothetical marketplace the Panel

is directed to analyze. Although the seller in these negotiations was different (RIAA,

rather than record companies), the buyers were the same, and the rights for sale were

identical. Of course, the marketplace differed since the agreements were negotiated

within the context of a compulsory license, while the hypothetical marketplace is one

where no compulsory license would exist. See Section III.A.3. supra. However, the very

fact that RIAA, a single designated negotiating agent of the record companies with

potential to yield monopolistic power, negotiated the agreements under the shadow of the

compulsory license, renders the agreements more, rather than less, comparable. Stated

otherwise, because the agreements were negotiated with DMCA-compliant services in

the context of a protective compulsory license, the distinction between RIAA as seller, in

contrast to the record companies as sellers, becomes much lesssignificant. So long as

buyers could avail themselves of the compulsory license, RIAA was deprived of a
46

monopoly seller’s most effective power, i.e., the ability to withhold a product from the

marketplace.

Thus, the 26 RIAA agreements were negotiated in a marketplace with two

countervailing features not present in the hypothetical marketplace envisioned by

Sections 112 and 114. The antitrust exemption, which allowed RIAA to negotiate for all

copyright owners, had the effect of strengthening the seller’s bargaining power. And the

compulsory license, which allowed services to use all sound recordings without having a

single license agreement, had the effect of strengthening the buyers’ bargaining power.

Based on a knowledgeable weighing of this voluminous record, including its own

questioning and credibility assessments of more than 30 witnesses, the Panel concludes

that neither of these factors has been shown to outweigh the other, and they should thus

be deemed to be effectively counterbalancing. Accordingly, the relative market power of

the buyer group and seller group in the hypothetical market would be roughly comparable

to the relative market power of the buyer group and seller group in the market which

produced these 26 agreements.

In the absence of additional agreements between DMCA-compliant services and

record companies, therefore, the Panel concludes that the 26 RIAA license agreements

constitute the next closest approximation of the hypothetical market. If analysis

determines that a reliable benchmark can be gleaned from these license agreements, the

Panel should look to that benchmark rather than the Webcasters’ theoretical model,

which attempts to deduce a rate through a series of assumptions drawn from a

marketplace far removed from the one envisioned in this statute.
47

G. CLOSE SCRUTINY REQUIRED

For the reasons stated above, the 26 RIAA agreements constitute an appropriate

starting point for rate-setting in this proceeding. However, these license agreements must

be scrutinized to determine whether individual circumstances or anomalous conditions

render them unreliable as benchmarks. This is particularly true under the circumstances

present here, where the agreements were all recently negotiated within the context of a

newly emerged industry (webcasting) involving newly-created rights (Sections 114 and

112). Because these are new rights, both RIAA and its licensees, including even the most

sophisticated ones, negotiated these agreements without benefit of established historical

standards. Both sides had “considerable uncertainty about the ultimate equilibrium value

for the right.” Jaffe W.D.T. 15-16. Such license agreements should be approached with

caution, since they may not reflect fully educated assessments of the nascent businesses’

long-term prospects. Cf. ASCAP v. Showtime, 912 F.2d 563 at 567, 579. The resulting

licenses warrant less confidence as benchmarks than would comparable agreements

negotiated over a long period, which had withstood the “test of time.” Cf. United States v.

ASCAP, No. 41-1395, 13-14 (S.D.N.Y. June 11, 2001).

Bearing in mind these cautions, we turn to the agreements themselves and note

that, with one significant exception discussed at length infra, the 26 agreements generally

provide Section 114(f)(2) webcaster rates of 0.4¢ per performance.26 See RIAA Exs. 60

DR – 85 DR; Marks W.D.T. (Attachment B). Section 112(e) ephemeral license fees of

about 10% of performance fees are generally provided in those agreements that expressly

 

26 Those agreements prescribing a percentage-of-revenue metric generally fall in the 15% of

revenue range.
48

grant such rights.27 See id. Given the range of rates that one would expect to occur in a

newly emerging marketplace such as the one we replicate, the Panel must now consider

whether the 0.4¢ per performance and 10% ephemeral rates contained in most of these

agreements truly reflect the rates that willing buyers and willing sellers would typically

pay in a hypothetical marketplace.

1. The RIAA Negotiating Strategy

Considerable hearing time was devoted to examining the circumstances

surrounding the negotiation of each of RIAA’s agreements with the 26 licensees.

Moreover, the Panel has studied each agreement thoroughly. From this evidence, a clear

and definitive pattern is apparent. Before negotiating its first agreement, RIAA

developed a strategy to negotiate deals for the purpose of establishing a high benchmark

for later use as precedent, in the event a CARP proceeding were necessary. The RIAA

Negotiating Committee reached a determination as to what it viewed as the “sweet spot”

for the Section 114(f)(2) royalty, both on a percent-of-revenue basis and per-performance

basis.28 See Tr. 9415-16, 9418-19, 9422-26. It then proceeded to close only those deals

(with the exception of Yahoo!) that would be in substantial conformity with that “sweet

spot.” See RIAA Exhibits 060 DR through 084 DR.

 

27 Curiously, as in the xxxxxxxxxxxxxxxx agreement, many of the license agreements contain no

grant of ephemeral rights, and they contain language virtually identical to that in the xxxxxxxxxx

xxxxx agreement, which limits rights to those expressly granted. See note 25 supra. For the

reasons previously stated, we do not consider such agreements as benchmarks for rights not

granted. See id.

28 This “sweet spot” was not based on any calculation of a reasonable rate of return for copyright

owners’ investment, nor upon any other economic study. It simply reflected the Negotiating

Committee’s instinct of what price the marketplace would bear. Tr 1865, 1879-81 (Wilcox); Tr.

9416 (Marks). Thus, these rates have no independent economic validity, they are meaningful only

to the extent the marketplace has accepted them.
49

Numerous internal documents from months of negotiations with many licensees

confirm this consistent RIAA strategy. Thus, for example, during negotiation of the

critical first agreement, RIAA’s Chief Negotiator Steven Marks wrote to the RIAA

Negotiating Committee:

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

RIAA Exhibit 137 DR at RIAA N13617-18

Subsequently, MMM readily acquiesced in RIAA’s request to separate the

performance license from the ephemeral license. See Id. Because, for various reasons,

MMM urgently sought to conclude a deal, it attempted little negotiation of the

fundamental economic terms of the agreement – other than the minimum fee. See Tr.

9632-33; Services Ex. SX 43. See generally RIAA Exhibit 137 DR.

The record also reveals that during negotiations with Broadcast.com, Mr. Marks

explained that a certain proposal was unacceptable to RIAA because it xxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx He also informed Broadcast.com that xxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx RIAA Exhibit 137 DR at RIAA

N11732, N1009. Similarly, during a later stage of the negotiations with Yahoo! (which

had acquired Broadcast.com), Mr. Marks expressed concern that the deal xxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx RIAA Exhibit 137 DR at RIAA N11732.

RIAA asserts that the reference to “precedent” throughout the various

negotiations was intended to mean “marketplace precedent” -- rather than precedents
50

intended to be used in the CARP. See e.g., RIAA RPFFCL ¶ 120. This explanation lacks

credibility. RIAA meticulously crafted confidentiality clauses for each and every license

agreement. These clauses prohibit any licensee from discussing the terms and conditions

of the agreement with other parties. See RIAA Exs. 60 DR- 84 DR. But it simultaneously

reserved its own right to use each agreement however it wished at the CARP proceeding.

See id. These clauses belie the notion that RIAA’s primary29 concern was to establish

precedents for other potential licensees.

As we have noted, in the statutory marketplace, one would expect to find some

buyers - for various reasons – that are willing to pay higher rates for a product than most

other buyers pay. But, if a seller is in a position to temporarily sacrifice volume, it can

afford to negotiate deals only with those buyers willing to pay above-market rates. By

engaging in this conduct, the Panel finds, RIAA created a virtually uniform precedent

with rates above those that most buyers would be willing to pay. 30

Moreover, RIAA devoted extraordinary efforts and incurred substantial

transactional costs to negotiate successfully a relatively small number (26 agreements out

of hundreds of services) of license agreements with mostly minor services -- services that

promised very little actual payment of royalties. See discussion infra Section V.G.2;

RIAA Exhibit 126 DP; Marks W.D.T. 4. Such sacrificial conduct makes economic sense

 

29 We do not find that establishment of a high CARP benchmark was RIAA’s only motivation.

We do not doubt that RIAA sought to “sign up” as many licensees as it could – particularly

“major players” like “AOL, Viacom and Yahoo!” (see Tr. 558-60 (Rosen)) – in hope of avoiding

an expensive and risky CARP proceeding. RIAA hoped that if a major player fell in line, all

others would follow. See id. See also Tr. 13876-77 (Marks).

30 By contrast, the xxxxxxxxxx license, involving the only DMCA-compliant service that

negotiated with an individual record company, produced a royalty rate significantly less than the

“sweet spot” RIAA rate. See Section V.E., supra.
51

only if calculated to set a high benchmark to be later imposed upon the much larger

constellation of services.

In fact, RIAA reached agreement with only 26 of the 60 services with which it

had “meaningful discussions.” RIAA PFFCL ¶ 189. And RIAA offered virtually no

evidence to explain why the majority of these services did not conclude an agreement. In

the absence of alternative explanations, the Panel infers that this majority of buyers was

simply unwilling to agree to the rates RIAA was seeking. Indeed, had RIAA not pursued

this negotiating strategy, we would have expected to see a much broader range of

negotiated rates. The tight range of rates among the 25 non-Yahoo! agreements suggests

a take-it-or-leave-it approach. RIAA decided to deviate significantly from its 0.4¢

precedential rate on only one occasion – to successfully negotiate the deal with Yahoo.

See n.26 supra.

Because RIAA was apparently able to close deals at its “sweet spot” with only a

minority of licensees, the Panel finds that these non-Yahoo! agreements do not establish a

reliable benchmark. Rather, they establish, at best, the high end of the rate range that

some services (with special circumstances) might pay. Before addressing the Yahoo!

agreement, however, we shall set forth additional bases for determining that the 0.4 ¢ rate

(as represented by the 25 non-Yahoo! agreements) is not a useful benchmark.

2. Licensees That Paid Little or No Royalties

 Or Quickly Ceased Operating

Although RIAA has urged the Panel to adopt the rates represented in the 26

voluntary agreements it negotiated with licensees, one of RIAA’s lead economic experts,

Dr. Thomas T. Nagle, enunciated principles that would result in the Panel rejecting nearly

all of these agreements. Dr. Nagle testified that the Panel should accord no weight to
52

agreements with licensees which are unable to endure in the marketplace. See Tr. 2642-

48 (Nagle). Dr. Nagle rested his overall analysis on the fundamental assumption that the

current webcasting industry consists of a large number of marginal or insignificant

entities (see, e.g., Tr. 13393 (Nagle); Nagle W.D.T. 5) and that a dramatic “shake out”

must and will occur. See id. This, in his view, is both inevitable and desirable because it

will bring about market consolidation, which will result in the emergence of a far smaller

number of viable webcaster companies. These, in turn, will be able to prosper and endure

(operate at a “sustainable scale at this future point of viability” (Nagle W.D.T. 6)) and,

not incidentally, be able to afford significantly higher royalty payments to copyright

owners. RIAA Ex. 108 DP (Nagle analysis) at 15. The actions of the marginal economic

entities which are fated to disappear in this process, in Dr. Nagle’s view, are

economically inconsequential and offer virtually no probative value as benchmarks for

setting future royalty rates. Tr. 2642-48, 13393 (Nagle).

This testimony is significant because the majority of RIAA’s 26 licensees fall into

the category of smaller entities which are unlikely to endure. A number of them never

launched their services, and another group, after launching, have already ceased

operation. All but a handful of the 26 licensees either (1) paid zero royalties; (2) paid no

royalties beyond the prescribed minimum (due to low revenues or because they streamed

so few transmissions); or (3) quickly went out of business. These licensees include

Cyberaxis; Multicast Technologies, Inc.; Cornerbrand.com; Beem-Me-Up Broadcasting;

Spacial Audio Solutions; Cybertainment Sys. Corp.; Kickradio.com;31 NRJ Media Corp.;

 

31 The xxxxxxxx agreement does not specify a “minimum.” See RIAA Exhibit xxxxxx. It

requires a xxxxxx advance, which was paid. However, the service has not yet launched, and the

fee formula appears illusory. See id. See also Webcasters PFFCL ¶¶ 216-17, n.102.
53

JamRadio.com; MoodLogic, Inc.; She Sings Media, LLC; GaliMusica; OnAir.com;32

Soundbreak.com; Spike Internet Radio, Inc;33 Visual Dynamics, LLC; eNashville;

Fansedge, Inc.; The Buzz Bin.com; and SLAM Media, Inc. See RIAA Exhibit 15 RR, 80

DR, 70 DR, 70A DR; 84 DR, 82 DR, 69 DR, 73 DR, 63 DR, 63A DR, 64 DR, 064A DR,

77 DR, 79 DR, 68 DR, 66 DR, 74 DR, 76 DR, 65 DR, 67 DR, 72 DR, 81 DR, 71 DR.

Another licensee has paid de minimis royalties of less than xxxxx over two license

terms.34 See Tr. 9918-31 (Marks); RIAA Exhibit 15 DR, xxxxxxxxxxxxx.

Apart from Dr. Nagle’s opinion, several factors support the conclusion that

agreements involving non-functioning or minimally-functioning services (under which

few or no royalties have been paid) should carry significantly less weight as benchmarks

than licensing agreements involving vibrant businesses that have paid significant

royalties. First, smaller, economically marginal licensees that expected to earn little

revenue, or to stream few transmissions, would care little, when negotiating their

agreements, about the fee formula -- other than the minimum fee required. Second,

services that quickly terminated their businesses tend to exhibit little business acumen or

experience. See e.g., Tr. 13390-92 (Nagle). In this new marketplace, agreements with

licensees of these sorts should be accorded significantly less weight. Cf. ASCAP v.

Showtime, 912 F.2d 563 at 567, 579. Indeed, a strict application of Dr. Nagle’s opinion

 

32 Additionally, the Panel has concerns that OnAir.com perceived an RIAA license to be

considerably more advantageous than a statutory license for its particular circumstances. See

Webcasters PFFCL ¶ 209.

33 Operators of Spike Internet Radio also appear to have been under time constraints that could

have precluded negotiation of individual licenses with the record companies. See Webcasters

PFFCL ¶¶ 253-54. See also Section V.G.3. infra.
54

that any agreement with a service that is not “economically viable” should be accorded

no weight as a potential benchmark (see Tr. 2642-48, 13390-93 (Nagle)) would eliminate

all but three or “potentially four” of the 26 agreements from any consideration.

The Panel renders no findings with regard to the inevitability of an industry

“shake out” or any inherent characteristics of smaller services. However, the Panel does

find that certain actions of a clear majority of the 26 licensees appear to demonstrate a

significant lack of understanding with respect to important aspects of the DMCA. One

clear example, described more fully in Section V.N.3. below, is the failure of a majority

of the 26 to negotiate the right to make the ephemeral copies of sound recordings

necessary to the successful operation of their services. This demonstrated lack of

business acumen tends to further erode Panel confidence in the weight to be accorded

these agreements as benchmarks.

3. Licensees that Could Not Wait for the Statutory License

As explained previously, so long as prospective licensees could avail themselves

of the compulsory license, RIAA would be deprived of any significant potential to

exercise monopolist power. See Section V.F. supra. However, if due to special

circumstances, some licensees required immediate RIAA licenses, these licensees would

no longer be shielded from the potential monopoly power of RIAA. And negotiating

DMCA-compliant, voluntary licenses directly with the record companies may have been

 

34 It also appears that the extremely unsophisticated operator of this service, xxxxxxxxxxxxx, may

have believed that an RIAA license agreement was required even under the statutory license. See

RIAA Exhibit xxxxxx at RIAA N1750.
55

unattractive.35 Under such circumstances, the resulting rates must be deemed to

constitute above-market rates. In addition to Spike Internet Radio (see n.33, supra), both

musicmusicmusic (“MMM”) and Websound fall into this category.

MMM was the very first license which RIAA negotiated at its predetermined

“sweet spot.” See Section V.G.1., supra. MMM had at least three reasons to need an

immediate license: (1) to diffuse negative publicity stemming from a Canadian ceaseand-desist order, (2) to generate positive press promotion bybecoming the first RIAA

licensee, and (3) to allay concerns of foreign investors respecting an upcoming initial

public offering in Germany. Thus, MMM was extraordinarily eager to secure a voluntary

license from RIAA. (See Webcasters PFFCL ¶¶ 150-53; RIAA Exhibit 128 DR.)

Furthermore, MMM clearly perceived an RIAA license to be more valuable than a

statutory license. (See Webcasters PFFCL ¶¶ 155-61.) In fact, Mr. Spegg of MMM

candidly acknowledged that, because of these factors, xxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxx36 See Tr. 12929-33 (Spegg). Except as to the precise definition of

the revenue base, MMM docilely accepted RIAA’s proposed xxx of revenue fee model

virtually without substantive negotiation. See id.

 

35 For example, time may not have permitted such negotiations. Or, services might have found

the prospect of negotiating a DMCA-compliant license with multiple record companies (that all

had access to confidential RIAA records) quite unattractive. Indeed, only one service did

conclude a DMCA compliant voluntary license. See Section V.E. supra.

36 We assume this reasoning also applied to the renewal license (see RIAA Exhibit 60A DR). We

also note that in the renewal agreement, MMM successfully negotiated a type of mutual MFN

clause whereby xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx See id.

This further renders the agreement less useful as a benchmark. It would be circular reasoning for

the Panel to rely upon an agreement to establish a marketplace rate xxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxx
56

The Panel also finds that Websound felt a similar sense of urgency. Websound

appeared to have been under two time pressures: (1) to resolve uncertainty regarding

whether the service would qualify for the statutory license (see RIAA Exhibit 136 DR at

N9422), and (2) to secure confirmation of its license status for its customers. See id at

N9421-23, N9720, N9751, N9772-73. See also Tr. 10122-26 (Marks). It is also

significant that Websound is a very minor player in this market. Despite acceding to one

of the highest royalty rates, it has paid less than xxxxxxx since the agreement was

executed in September 2000 – less than xx of the fees paid by Yahoo! over a similar

period. See RIAA Exhibit 15 RR.

For these reasons, the Panel concludes that the MMM and Websound agreements

reflect buyers at the high end of the rate range and are, as such, of little use as

benchmarks for the average marketplace rate.

Putting aside licensees which either (1) paid no royalties beyond the prescribed

minimum, (2) quickly ceased operating, or (3) could not wait for the statutory license,

only three of RIAA’s 26 licensees remain: MusicMatch; Lomasoft; and Yahoo!. Each of

these three merit individual discussion.

4. MusicMatch License Agreement

Because the negotiation of the MusicMatch agreement was closely associated

with the settlement of infringement litigation initiated by RIAA, it cannot be reasonably

characterized as the product of marketplace negotiations between a typical willing buyer

and a typical willing seller. Indeed, in order to end RIAA’s litigation against it,

MusicMatch eventually accepted license fees and terms less favorable than those it had

rejected prior to the litigation. See Webcasters PFFCL ¶¶ 137, 140-44; RIAA exhibit 115
57

DR; RIAA Exhibit 152 DR. The Panel also notes that this agreement contains a type of

MFN clause xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx37 This

provision further erodes the usefulness of this agreement as a benchmark for what willing

buyers and willing sellers would agree to in a hypothetical marketplace where no

statutory license (and therefore no CARP proceeding) existed. See n.37, supra.

Accordingly, the Panel finds that this agreement reflects rates above those that willing

buyers and sellers would normally negotiate and, in any event, its MFN clause renders it

of little use as a benchmark.

5. Lomasoft License Agreement

The Lomasoft agreement, RIAA’s second license, was negotiated shortly after the

MMM license described previously. See Marks W.D.T. (Attachment B). With minor

exceptions, it contained the same percentage of revenue fee model as the first license.38

See id. The record indicates that Lomasoft is another small service, whose two operators

had no prior music licensing experience. See Tr. 13109-13, 13119 (Heilbronn).

Moreover, since concluding its license agreement with RIAA in August 1999, Lomasoft

paid total royalties of approximately xxxxxxx (about xx of Yahoo! payments). See RIAA

Ex.15 RR.

The probative value of the Lomasoft license is also diminished because it has

expired and not been renewed. See Tr. 13105, 13114 (Heilbronn). Apparently realizing

that he initially overpaid, Mr. Heilbronn never seriously discussed renewal of the license.

 

37 [Deleted due to correction of footnote 36.]

38 RIAA informed Lomasoft that xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxx (emphasis added). RIAA Exhibit 129 DR at RIAA N8552.
58

He testified that xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxx Tr. 13115.

Evidently, Lomasoft deemed negotiations with RIAA a futile mismatch. We do not

doubt this to be the case. Lomasoft negotiated a license agreement that does not even grant

it the right to make multiple ephemeral copies (see RIAA Exhibit 61 DR at §§ 2.2, 2.5),

although it appears that the company requires such copies. Cf. Tr. 14972-74. Indeed,

Lomasoft believes that the performance license did grant it the right to make ephemeral

copies at no additional charge (see Tr. 13106-07 (Heilbronn)), even though the agreement

clearly excludes such rights. See RIAA Exhibit 061 DR at §§ 2.2, 2.5. This record reflects

grossly mismatched negotiating parties.39

 

39 In addition to Lomasoft, a clear majority of the original 26 RIAA agreements did not grant the

right to make ephemeral copies, including original licenses for Radiofreeworld, NRJ Media,

JamRadio, Visual Dynamics, OnAir.com, eNashville, GaliMusica, Spacial Audio Solutions,

Multicast Technologies, SLAM Media, Fansedge, Cybertainment, Beem-Me-Up, and

Cornerband. We recognize the possibility that some of these services may have erroneously

perceived that they could operate their services without this right. Cf. Tr. 14970-71 (Garrett). But

interestingly, of these licensees that ultimately renewed their licenses, each renewal contained the

grant of rights to make ephemeral copies (for a specified fee). See RIAA Exhibits xxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx; Tr. 14969 (Garrett) xxxxxxxxxxxxxxx. Because the

record does not reflect that any of these licensees changed the manner in which they delivered

their services from the first license to the second, we must assume that they required an

ephemeral license all along. Moreover, RIAA’s own expert witness testified that the process of

“ripping” CDs to a server entails copying. See W.D.T. of Griffin 6. See also Tr. 8651 (Talley)

(ephemeral [buffer] copies are produced whenever a CD is played). Thus, these licensee’s lack of

sophistication further enhanced RIAA’s ability to secure above-market rates that it could later

offer as benchmarks.
59

Given this totality of circumstances, we have little confidence that the Lomasoft

agreement reflects a representative rate that willing buyers and willing sellers would

normally negotiate.

6. Weight To Be Given the 25 Non-Yahoo! Agreements

For the reasons cited previously, and for many additional ones not addressed

here,40 the Services assert that none of the RIAA license agreements are entitled to any

weight whatever in establishing the statutory royalty rates. See Webcasters PFFCL ¶ 65.

Conversely, RIAA does not concede a single problem with regard to any of these license

agreements and continues to offer them all as record support for its rate proposals. RIAA

argues that all of these licensees, as well as the circumstances surrounding the negotiation

of the license agreements, are representative of the real world marketplace. See generally

RIAA PFFCL ¶¶ 271-314. For example, RIAA asserts that many webcasters are subject

to time constraints, require prompt licensing for certainty or other reasons (see id. at 299-

301), or desire positive publicity. See id. at 309. While the Panel agrees that the nonYahoo! licensees are not unique, RIAA has certainly not shown that they are

representative of the majority of webcasters. Doubtless, some licensees do share

individual circumstances that would induce them to pay higher rates than services that do

not share such circumstances. See, e.g., Tr. 2614-18, 2762 (Nagle) (“soda on the beach”

example). But such licensees merely establish the upper bounds of the expected rate

range, not the rates to which more representative buyers would willingly agree.

 

40 See generally Webcasters PFFCL ¶¶ 65-272. These additional arguments generally entail

allegations that (1) the licensees were not comparable types of services; (2) the licenses were

negotiated under non-comparable circumstances; or (3) the licenses negotiated reflect RIAA’s

unconstrained monopoly power.
60

As to those licensees that paid little or no royalties, RIAA notes that some of the

Services that are party to this proceeding are of comparable size or have ceased

operations. See id. at 288-91. This entirely misses the point. If those Services had

reached agreements with RIAA, and then paid no royalties beyond the recited minimum,

or quickly went out of business, the Panel would accord those agreements very little

weight either. For the reasons previously cited, it is difficult to imagine how one could

rely on such agreements with any confidence.

In sum, the Panel concludes that the 25 non-Yahoo! license agreements (as well

as the xxxxxxxxxxxxxxxx agreement) are unreliable benchmarks. They are entitled to

very little weight for the purpose of determining the rate that willing buyers and willing

sellers would normally negotiate in the relevant marketplace. The RIAA agreement with

Yahoo!, however, is marketplace evidence of an entirely different character.

7. The Yahoo! License Agreement

Initially the Panel notes that Yahoo! alone accounts for over xxxx of all royalties

paid to RIAA under the 26 relevant voluntary licenses. See RIAA Exhibit 15 RR. And

because it pays substantially lower rates than other licensees, the xxxx payment

percentage suggests that Yahoo! transmissions account for far more than xxxx of all

DMCA-compliant performances for which sellers have received payments. On this basis

alone, barring special circumstances, the Yahoo! rates should be accorded significant

weight.

There is another compelling reason for according the Yahoo! agreement great

weight. Of all the parties with whom RIAA negotiated license agreements, Yahoo! is the

only one with resources, sophistication, and market power comparable to that of RIAA.
61

Yahoo! is one of the world’s leading internet companies. See Marks W.D.T. 27-28; Tr.

11384 (Mandelbrot); Panel Rebuttal Hearing Exhibit 1 at 1, 3, and 7. For the calendar

year (2000) in which its license agreement with RIAA was executed, Yahoo! had net

revenues of xxxxxxxxxx and net income of xxxxxxxxxx. Panel Rebuttal Hearing Exhibit

1 at 3. Thus, the Yahoo!-RIAA negotiation was the only one to reflect a truly arms-length

bargaining process on a level playing field between two major players of comparable

skill, size, and economic power.

(a) Description of the Yahoo! Streaming Service

In the audio streaming portion of its service, Yahoo! operates as an “aggregator”

that serves as a portal for AM/FM radio stations and other webcaster sites. See Panel

Rebuttal Hearing Exhibit 1 at 3. At the time the Yahoo! license agreement was

negotiated, about xxxx of its streaming performances were radio retransmissions41

(“RR”), in which, pursuant to a business arrangement with an AM or FM radio station,

Yahoo! transmitted that station’s broadcast signal over the internet. At that time, internetonly (“IO”) performances - - transmission of programming not simultaneously broadcast

over-the-air by any radio station - - constituted the remaining xxxx of Yahoo!’s

transmissions. This approximate ratio was expected to continue for the next xxxxxxxxx

xxxxx See Panel Rebuttal Hearing Exhibit 1 at 5.

(b) The Yahoo! Terms

The pertinent terms of the Yahoo!/RIAA license agreement follow:

 

41 Retransmission is defined in 17 U.S.C. §114(j)(12) to mean a further, simultaneous

transmission of an initial transmission.
62

• An initial fee of xxxxxxxxxxx for the first xxxxxxxx performances

commencing retroactively to October 28, 1998; this is a lump sum

payment that does not depend on the type of performance (RR versus IO)

(see RIAA Exhibit 075 DR at § 3.1);

• After the initial xxxxxxxx performances, the prescribed rate for IO

performances is xxx per performance (see id. at § 1.11) and the rate for

RR performances is xxxx per performance (see id. at § 3.5.1);

• A lump-sum xxxxxxx payment for ephemeral recordings through December

31, 2000 and a lump-sum xxxxxx payment for each subsequent renewal

term (see id. at §§ 3.1, 3.4);

• A xxxxxx lump sum fee for featured performances on non-music radio

stations through December 31, 2000, plus xxxxx per year during each

renewal term (see id. at §§ 3.1, 3.4);

• An initial term running from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (see id.

at §§ 3.2.2, 3.2.3, 6.1.2);

• A type of MFN clause in which Yahoo! is entitled to xxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (see id. at § 3.6.1);
63

• A confidentiality clause xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (see id. at §§ 5.1,

5.2);

• A non-cooperation clause that xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (see

id. at § 3.7.3); and

• A “whereas” clause in which it is recited that approximately xxxxxxxx of

Yahoo!’s radio retransmissions are within a 150-mile radius of the

originating radio station. See id. (introductory clauses).

Most of the performance fees paid by Yahoo! to date were paid under the

undifferentiated, lump sum payment applicable to the first xxxxxxxxx performances. This

payment basis continued until late 2000. See id at § 3.1; Tr. 11275 (Mandelbrot); RIAA

Exhibit 15 RR; Webcasters PFFCL ¶ 107, n.50. That payment was the equivalent of a

“blended” rate of xxxx per performance (xxxxxxxxxxxxxxxxxxxxxx performances) (see

Tr. 11278 (Mandelbrot); Panel Rebuttal Hearing Exhibit 1 at 4; Webcasters PFFCL ¶

107, n.51) and was explicitly so described by the parties. RIAA Ex. 137 DR at N0939.

Beginning in late 2000, Yahoo! began paying fees under the differentiated rates of xxx

per IO performance and xxxx per RR performance. Because, in the near term, Yahoo!’s

streaming activities were expected to remain at approximately xxx RR and xxx IO,

Yahoo! perceived the xxxx RR and xxxxx IO differentiated rates, for its performances in

excess of xxxxxxxx, as tantamount to a blended rate of xxxxxxxxxxxxxxxxxxxxxxxxxxx

xxx (see Tr. 11279, 11292 (Mandelbrot), Panel Rebuttal Hearing Exhibit 1 at 7), and
64

again, this was explicitly referenced during the negotiations. RIAA Ex. 137 DR at

N0946. Indeed, that projection proved fairly accurate throughout the period up to the time

of the hearing herein. See Tr. 11279, 11333, 11345 (Mandelbrot). The total performance

fees paid by Yahoo! through August 2001, yielded an effective rate of xxxxx. See

Webcasters PFFCL ¶ 108 n.52; Panel Rebuttal Hearing Exhibit 1 at 7.

(c) The Yahoo! Negotiation

Both the Services and RIAA agree that RIAA was highly motivated to reach an

agreement with Yahoo! See RIAA PFFCL ¶ 123; Webcasters PFFCL ¶ 114. RIAA

hoped that the news of an agreement with a “major player” would spur other webcasters

to sign agreements and obviate the need for a CARP proceeding. See id. See also n.29,

supra. However, RIAA was also keenly aware that any agreement with rates below its

prior established benchmarks might be used against it at the CARP proceeding. See e.g.,

RIAA Exhibit 137 DR at N11732. Accordingly, RIAA undertook two actions to protect

itself against this risk. First, it insisted upon the non-cooperation clause that xxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxx. See RIAA Exhibit 75 DR at § 3.7.3. Second, RIAA demanded the “whereas”

clause which recited that approximately xxxxxxxx of Yahoo!’s radio retransmissions are

within a 150-mile radius of the originating radio station. See id (introductory clauses).

The significance of this clause is explained later in this section.

Naturally, Yahoo!’s primary concern, as characterized by its negotiator, was to

negotiate a license agreement under which it would pay xxxxxxxxxxxxxxxxxxxxxxxxx

regardless of whether its fees were expressed as a blended rate or as differentiated rates

for RR and IO performances. Tr. 11299, 11255-57 (Mandelbrot). But, because xxx of its
65

transmissions were RR performances, Yahoo! was willing to accept a higher IO rate in

exchange for a lower RR rate in order to achieve the lowest overall effective rate for all

its transmissions. See id. at 11253-56.

Indeed, both parties were willing to, and did, artificially raise the IO rate in

exchange for artificially lowering the RR rate. See id. at 11256-57; 11281. This

arrangement met the needs of both Yahoo! and RIAA. Yahoo! was pleased to achieve

the lowest possible overall rate, while RIAA was pleased to raise the IO rate, so as to

protect its .04¢ benchmark to the maximum extent possible. See id; Panel Rebuttal

Hearing Exhibit 1 at 4; Tr. 11279-81, 11395-96 (Mandelbrot). See also Tr. 10237-38

(Marks); RIAA 137 DR at N14540 (Marks e-mail to negotiating committee member

stating that this strategy xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx).

Moreover, RIAA hoped that the confidentiality and non-cooperation clauses would

prevent Yahoo! from later xxxxxxxxx the integrity of the xxx IO rate.

42 Tr. 11419,

11283-84 (Mandelbrot).

The Panel concludes that RIAA was less concerned about the lower RR rate for

two reasons. First, since RIAA had not previously negotiated a license agreement with

 

42 Clearly, RIAA was concerned about protecting its IO benchmark of 0.4¢ to the maximum

extent possible. Early in the negotiations when a blended rate of xxxx was on the table, RIAA

expressed concerns that a stated blended rate xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxx RIAA 137 DR at N11732. Notwithstanding, RIAA ultimately agreed to an effective

(but unrecited) blended rate of xxxxx. See Section V.G.7.b., supra; see also Tr. 11395-96

(Mandelbrot) (“Q And was there discussion about why it was that the language was such that you

not only couldn’t participate, that you couldn’t quote cooperate with any party opposing licensor

and the CARP? A xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxx
66

any webcaster that retransmitted radio signals,43 it had no RR benchmark to protect.

Second, and more importantly, RIAA clearly intended to rely upon the “whereas” clause

which recited that approximately xxxxxxxx of Yahoo!’s radio retransmissions are within

a 150-mile radius of the originating radio station. See id. at 11409-12. Some context is

required to appreciate the significance of this clause.

At the time of the Yahoo! negotiations, radio broadcasters were claiming in

pending litigation that their retransmissions of their own radio signals over the internet

were exempt from the copyright laws. And even if not all of their retransmissions were

exempt, they argued, at least their own retransmissions to listeners within 150 miles of

their radio stations were exempt under Section 114(d)(1)(B)(i).44 See Tr. 9304-05,

10203, 10210, 10232-34, 14146-50 (Marks); Marks W.D.T. 15-16.

Naturally wishing to exploit the alleged “uncertainty” respecting these claims,

Yahoo! negotiators cited them as one basis, among many, for a lower RR rate. See id., Tr.

11307-08 (Mandelbrot). Understandably, they were also willing to agree to a “whereas”

clause that implied that the low RR rate was somehow related to this alleged legal

uncertainty respecting the 150-mile provision. In short, it cost Yahoo! nothing to accede

to RIAA’s insistence upon this clause. Both Yahoo! and RIAA, however, understood the

obvious -- that no uncertainty existed as to whether any Yahoo! retransmissions were

 

43 Subsequent to Yahoo, RIAA concluded an agreement with Cyberaxis, a small service that

retransmitted a single radio station signal. See RIAA Exhibit 80 DR at § 1.7. This small

operation xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. See id, RIAA Exhibit

15 RR.

44 These claims were subsequently rejected by the Librarian (see Order of July 16, 2001 at 5) and

a federal district court. See Bonneville Int’l, et al. v. Peters, 153 F. Supp. 2d 763 (E.D. Pa. 2001),

appeal pending. The Panel expresses no view concerning the merits of these claims. We have

simply proceeded, in accordance with the Librarian’s Order, to determine willing buyer/willing
67

exempt. See Tr. 11308-10; 11380-87 (Mandelbrot); 10181-83, 11380, 13853-55 (Marks).

If an exemption could possibly apply to anyone, it would apply to broadcasters – not to

third party transmitters such as Yahoo!. The only rational argument available to Yahoo!

was that it would be at a competitive disadvantage should either of the alleged

exemptions ultimately be validated. See id. Mr. Mandelbrot testified that Yahoo!

understood that this argument was extremely weak and had no significant impact on the

rates ultimately negotiated. See id. The Panel finds Mr. Mandelbrot’s assertion credible

and agrees that this argument did not significantly affect the negotiated rates. However,

RIAA was conveniently left with the “whereas” clause, which enabled RIAA to argue

before this Panel that the xxxx RR rate reflects a “real” rate of xxx that had been

discounted45 to account for the alleged “legal uncertainty” at the time of the negotiation.

See e.g., RIAA PFFCL ¶¶ 122, 128.

(d) Other Factors Affecting the Yahoo! Rates

As described above, the Panel has concluded that Yahoo!’s xxx IO performance

rate was elevated above the IO rate that the parties would have agreed upon, but for their

agreement to lower the RR rate. Two other significant factors support an IO rate lower

than xxxx – the MFN clause and Yahoo!’s assessment of the cost of arbitrating the

CARP proceeding.

The MFN entitled Yahoo! to xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

 

seller rates for various types of streaming, including broadcasters, based on the evidence before

us.

45 The alleged discount ostensibly reflects that Yahoo! paid only for those transmissions that were

not “exempt,” thereby reducing the otherwise xxxx rate to the xxxxx RR rate.
68

Unlike the musicmusicmusic MFN clause that is xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxx, the Yahoo! MFN xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. However,

because the clause provides for the possibility of reduced royalties at some future time, it

does add some indeterminate amount of value for Yahoo!.

Another significant factor relates to arbitration costs. RIAA and Yahoo! both

understood that if Yahoo! had chosen to participate in this CARP proceeding, it would

have been expected, as a “major player,” to shoulder a significant portion of the

arbitration costs. See Tr. 10142-45 (Marks); 111248-49, 11269-76 (Mandelbrot). Yahoo!

estimated that these costs, along with lost “opportunity costs,”46 could approach xx

xxxxxx. See id. at 11274-76. Naturally, Yahoo! was willing to accept inflated royalty

rates if it could realize an even greater savings in arbitration costs. Of course, because

RIAA was also motivated to save arbitration costs (that it would bear almost exclusively),

it too was arguably willing to accept a somewhat lower rate if it believed settlement with

Yahoo! would spur an industry-wide settlement and thereby avoid the necessity of RIAA

incurring any arbitration costs.47 On balance, however, we think the issue of arbitration

costs militates in favor of Yahoo!. If Yahoo! reached agreement with RIAA, it

definitively avoided arbitration costs. In contrast, if RIAA reached agreement with

Yahoo!, the existence of many other unsigned licensees meant that RIAA still faced a

 

46 Referring to costs associated with Yahoo! managers directing time and resources toward the

CARP arbitration, rather than to developing new aspects of the business. See Tr. 11248-49,

11271-76 (Mandelbrot).

47 RIAA President Hillary Rosen testified that there were really only three big players on the

internet (namely, AOL, Viacom, and Yahoo!) and that RIAA’s hope was that an agreement with

Yahoo! would prompt the other two to follow. Tr. 559 (Rosen). Of course, it is quite unlikely that

AOL and Viacom, who are as sophisticated as Yahoo! would agree to rates higher than Yahoo!’s.

Thus, RIAA’s goal of an “industry wide solution” really reflected a willingness to accept rates in

the Yahoo! range if those could be established across the board.
69

substantial prospect of having to arbitrate, as indeed has happened. For this reason, we

believe the concern about arbitration costs also implies somewhat inflated rates.

Other considerations arguably imply even further inflated rates for both RR and

IO. See Webcasters PFFCL ¶¶ 121-27. For example, Webcasters argue that the Yahoo!

agreement eliminated certain legal ambiguities for Yahoo! and provided other benefits

that the statutory license does not afford. See id. at ¶ 126. However, it is unclear that the

agreement actually resolves the legal ambiguities cited by the Webcasters. See e.g., Tr.

11377-78 (Mandelbrot) (conceding that the agreement provides no more rights than

permitted by the DMCA). The other alleged benefits are of minor consequence.48

(e) Impact of the Yahoo! Agreement

We began our discussion of the Yahoo!/RIAA agreement by noting its economic

significance. First, Yahoo! accounts for both the vast majority (approximately xxxx

xxxx) of DMCA-compliant royalties paid and an even larger percentage of the number of

performances transmitted. Second, this agreement also represents the results of a level

playing field negotiation. Sophisticated business people with the legal and financial

resources to press their interests forcefully sat on both sides of the negotiating table that

produced this agreement. Indeed, the Yahoo! license agreement appears to be the sole

 

48 RIAA argues that the Yahoo! rates actually reflect below-market rates based upon two factors.

First, RIAA asserts that it “gambled that agreeing to a below-market rate with Yahoo would avoid

the uncertainty and costs associated with a CARP proceeding.” RIAA PFFCL ¶¶ 120-24. We

already addressed these issues (settlement with Yahoo! obviously did not guarantee avoidance of

CARP proceeding). See Section V.G.7. c and d, supra. Second, RIAA claims that it acceded to

below-market rates in return for a large lump sum payment. See RIAA PFFCL ¶ 127. While

there is obviously some value in receiving an advance payment, that value is substantially

outweighed by the other factors at play. These other factors include (1) the total payments that

would be due under the agreement (dependent upon the agreed rates) and (2) precedential value

for the CARP proceeding. Moreover, in the voluminous record materials related to this
70

agreement where the rate was not the result of an essentially take-it-or-leave-it

negotiating process. Third, the terms of this agreement provide, after the initial period,

for different rates for different types of transmissions, a consideration which Section 114

(f)(2)(B) specifically directs us to employ in our rate-setting. Thus, the elements of this

agreement, its economic significance, and the matching strengths of the parties who

negotiated it, all support its use as the most reliable benchmark for what a willing buyer

and a willing seller would agree to in the marketplace.

However, before reaching a final conclusion that the Yahoo! agreement

constitutes the most representative benchmark available to us, the Panel must address one

final argument. RIAA contends that three forms of corroborating evidence demonstrate

that the 0.4¢ rate specified in most of the 25 non-Yahoo! agreements constitutes the most

appropriate benchmark. We address this claim below.

H. RIAA’S “CORROBORATING EVIDENCE”

RIAA asserts that its proposed benchmark rates -- a performance royalty of 0.4¢

per performance plus an additional 10% ephemeral copy royalty -- are corroborated by

three forms of record evidence, namely (1) 115 individual record company agreements,

(2) an analysis of the standards enunciated in the Georgia Pacific case, and (3) an expert

Economic Value Estimation. The Panel concludes that RIAA’s argument is not

persuasive and addresses briefly the principal deficiencies in each type of “corroborating

evidence.”

 

negotiation, the lump sum payment plays a minor role in the many evaluations exchanged both

between the parties and within the RIAA Negotiating Committee.
71

1. The 115 Record Company Agreements

For reasons similar to those enunciated in our critique of the Webcasters’

benchmark, the Panel rejects these agreements as useful benchmarks for the Section 114

rights at issue here. While the licensees in these agreements (digital music users) are

similar to Section 114(f)(2) buyers, except for the xxxxxxxxxxxxxxxx agreement

previously discussed, the record company agreements cover different rights not subject to

the Section 114(f)(2) statutory license. By contrast, the 26 RIAA agreements license the

precise rights at issue here. Moreover, to the extent the Panel were inclined to utilize

these record company agreements, the effect would likely be to undermine, not

corroborate, RIAA’s proposals in that many of the agreements reflect rates below those

which RIAA is proposing. For example, license agreements for xxxxxxxxxxxxxxxxxxxx

recite rates ranging from xxxxxxxxxxx. See e.g., RIAA Exs. 90 DR - 95 DR. Yet, RIAA

proposes 0.5¢ for webcasting syndication services and 0.6¢ for listener influenced

webcasting services (neither are on-demand). See Section IV.A., supra.

2. The Georgia Pacific Analysis

RIAA expert, Dr. Robert Yerman, testified about certain criteria enunciated in the

case of Georgia Pacific v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y.

1970), for the purpose of determining appropriate damages in patent infringement cases.

After applying these criteria to the 26 RIAA agreements, he concluded that they generally

support the rates proposed by RIAA. See Yerman W.D.T. 1, 5-6. The Panel agrees with

Dr. Yerman’s general conclusion that the 26 RIAA agreements are potentially compelling

rate benchmarks. See Sections V.D. and V.F., supra. However, Dr. Yerman’s
72

conclusions are significantly undermined by two important factors. First, they were

based solely upon a review of the text of the 26 agreements. He did not review any of the

circumstances surrounding the negotiation of those agreements, as the Panel has done.

See e.g., Tr. 3727-29 (Yerman). Consequently, his analysis sheds no light on the weight

to be accorded each agreement and really adds little to the notion (which we have

already accepted) that comparable agreements are the best potential benchmarks.49

Another limitation on Dr. Yerman’s analysis, as explicated by Webcasters’ expert

witness Prof. William Fisher (Fisher W.R.T. ¶13; Tr. 11606-07 (Fisher)), is that the

Georgia Pacific case articulates standards for determining remedies for prior

infringement. This context introduces an extraneous element, characterized as having “a

punitive cast to it” (id. at 11606), which is not present in the non-infringement

marketplace that the Panel is directed to replicate, and which undermines its usefulness

for our purposes. Accordingly, the Georgia Pacific analysis does not, in any sense,

undermine our previous reasoning.

3. The Economic Value Estimation

As described previously, RIAA witness, Dr. Thomas Nagle, conducted a pricing

strategy analysis designed to predict the royalty rates that hypothetical webcasters would

be willing to pay. He concluded that the rates proposed by RIAA are consistent with the

rates he would recommend based upon this analysis. See Tr. 2531-32. The analysis

seeks to ascertain the price that a theoretically viable webcaster would have been able to

 

49 These comments apply equally to the testimony of Dr. Wildman. See W.D.T. (Wildman) 1, 3-5,

15-19.
73

afford and still remain viable at some point in the future beyond the statutory license

period. See RIAA PFFCL ¶¶ 411-23.

As previously noted, Dr. Nagle contends that most webcasting services are not

economically viable and will not survive. See e.g., Tr. 13393 (Nagle); Nagle W.D.T. 5.

Thus, he asserts, the current economic value of the statutory licenses must be estimated

for webcasters that will operate at a “sustainable scale at this future point of viability.”

Nagle W.D.T. 6. That current value is determined by the price that suchwebcasters

could afford to pay after first paying their other expenses, and retaining sufficient profit

to earn “a reasonable return (which he places at 20 –30%) on their investment.” RIAA

Exhibit 108 DP (Dr. Nagle’s analysis) at 15 - 16.50 In essence, Dr. Nagle posits that

record companies could extract every last penny from webcasters beyond the amount

they needed to pay other expenses and derive such a return.

Dr. Nagle’s analysis necessarily relies upon a myriad of highly questionable

assumptions that appear inconsistent with foreseeable market conditions.51 For example,

Dr. Nagle assumes that the future viable webcaster will sell audio ads at $30 CPM,

selling about 60% of its inventory by 2005 (his projected date of viability). See Tr. 2569-

73. These figures appear overly optimistic. See e.g., Tr. xxxxxxxxxxxxxxxxxxxxx audio

ads are currently in the range of $5 to $15 with sales of less than 10% of inventory).

Moreover, Dr. Nagle’s estimate of projected unique listeners at the future date of viability

is not based upon any reliable projection. He merely calculates the number of unique

 

50 We view this allowance as quite arbitrary. If the webcasting industry represents the type of risk

to investors that Dr. Nagle appears to suggest, a 20-30% return on investment may be inadequate.

51 We recognize that some of these projections are partly based upon business plans of a few

webcasting services. However, we do not regard these projections, which are intended for

investors and appear to be constantly revised downward, as particularly reliable.
74

listeners he believes are required for profitability without regard to the likelihood of

attracting that number of listeners. See Tr. 2570 (Nagle).

We conclude that Dr. Nagle’s analysis does not support any particular rate level.

Moreover, Dr. Nagle’s analysis firmly supports use of the Yahoo! agreement as a reliable

benchmark, as contrasted with the other 25 licensees, many of which have already failed

the test of marketplace endurance. See Section V.G.2., supra. Accordingly, we now

proceed to a determination of specific royalty rates.

I. DETERMINATION OF SECTION 114(f)(2) WEBCASTING RATES.

The Panel previously concluded that the 26 RIAA license agreements potentially

constitute the best approximation of the hypothetical marketplace we attempt to replicate.

However, the 25 non-Yahoo! agreements merit extremely little weight as benchmarks for

the rates that willing buyers and willing sellers would normally negotiate in the relevant

marketplace. Only the Yahoo! agreement reflects a reliable approximation of suchrates

in the marketplace we attempt to replicate.

As previously noted, the “bottom line” combined rate was of paramount

importance to Yahoo!, but both parties also benefited from the artificially wide disparity

between the RR and the IO rates. Significantly, the Yahoo! agreement also establishes

that, in the actual marketplace, willing buyers and willing sellers negotiate RR rates

considerably lower than IO rates. This seems eminently understandable.

The dramatically different RR and IO marketplace rates contained in the Yahoo

agreement reflect essentially undisputed testimony that traditional over-the-air radio play
75

has a tremendous promotional impact on phonorecord sales. Indeed, record companies

have spent many millions of dollars over many decades to promote over-the-air play of

their releases. See, e.g., Tr. 530-33 (Rosen), 937-52 (Altschul), 1150-53 (Ciongoli), 1783-

85 (Wilcox), 2412 (Kenswil), 5717 (Fine), 5886 (Donahoe), 7657 (S. Fisher). Also,

endorsements from familiar, trusted radio station DJs are a key element in promoting

sales. McDermott W.R.T. 4; Tr. 7709-10 (S. Fisher). To the extent that internet

simulcasting of over-the-air broadcasts reaches the same local audience with the same

songs and the same DJ support, there is no record basis to conclude that the promotional

impact is any less. Tr. 5894-95, 6002 (Donahoe); see also Tr. 12861 (McDermott). This

factor was likely considered by RIAA and Yahoo!, and is evidently reflected in the

resulting difference between RR and IO negotiated rates. Apparently, RIAA concerns

about displacement of CD sales from internet performances do not apply equally to

retransmissions of radio broadcasts. See, e.g., Tr. 1112-15 (Katz); see also Jaffe W.R.T.

41-42.

In any event, the Panel’s task is now clear. If the Yahoo!/RIAA agreement is to

be used as a benchmark for determining the hypothetical marketplace rates, we must

adjust downward the IO rate to offset the inflationary factors previously identified in

Section V(G)(7)(c) and (d), and we must adjust upward the RR rate.

1. The Internet-Only Webcasting Rate

The Panel’s analysis implies a willing buyer/willing seller marketplace rate

somewhere between xxx (the artificially high IO-only rate) and the effective or blended
76

rates. In the absence of compelling reasons to do otherwise, we select the midpoint52 in

that range as the approximate marketplace rate for IO performances.53 In order to make

this calculation, we must select which of the three effective or blended rates (xxxxxxx

xxxxxxxxxxxxxx) to use as the endpoint. See Section V.G.7.b., supra.

The xxxxx effective rate is the least significant. This rate was never negotiated,

nor even discussed by the parties. It merely reflects an historical fortuity that resulted

from the particular mix of IO and RR performances that occurred from the effective date

of the license agreement through an arbitrary date for which data was available.

However, respectable arguments can be made for use of either the xxxxxx or

xxxxx rates as endpoints. On balance, we find the rationale for using xxxxx to be more

persuasive. The xxxxx blended rate constitutes the precise per-performance rate

negotiated by the parties for the first xxxxxxxx performances. It is also the precise fee

actually paid for each performance and the rate under which the majority of Yahoo!

performances were paid. By contrast, the xxxxx blended rate merely represents the

parties expectation of the rate that would effectively be paid if the ratio of RR to IO

 

52 Selection of a midpoint within a “zone of reasonableness” constitutes rational ratemaking. Cf.

National Cable Television Assoc. v. Copyright Royalty Tribunal, 724 F.2d 176, 182 (DC Cir.

1983) (“ratemaking is an intensely practical affair...[that] necessarily involves estimates and

approximations...that...lie within a zone of reasonableness” (internal quotation marks and

citations omitted)).

53 We note Webcasters’ assertion that the Yahoo! agreement should not serve as a benchmark for

webcasting because Yahoo!’s primary business model is not webcasting. See Webcasters PFFCL

¶¶ 101, 135. This argument has little merit. Webcasters consist of a diverse community of

services, all utilizing streaming, but comprise a range of different business models including

many services whose primary business model is not webcasting. See e.g., Webcasters PFFCL ¶

3; RIAA PFFCL ¶ 127. The Panel is aware of no substantial evidence that Yahoo! is not

comparable to other webcasters for purposes of rate setting. And the fact that Yahoo! is an

aggregator is similarly inconsequential. No party hereto has argued that agreements with

aggregators are per se inappropriate as rate benchmarks for other basic webcasters, and we are

aware of no record support for such an assertion.
77

performances remained at precisely xxxxx. This projection proved fairly accurate (but not

precisely so) throughout the period up to the CARP proceeding. See Tr. 11279, 11333,

11345, 11402 (Mandelbrot). Moreover, both parties expected the ratio to decline over

time, thereby yielding a slightly higher effective rate. See Tr. 10196-97 (Marks). Finally,

selecting the xxxxx rate rather than the xxxxx rate gives some minimal weight to the

higher rate, non-Yahoo! RIAA (and xxxxxxxxxxxxxxx) agreements. We believe this

constitutes all the weight those agreements should be afforded.

The midpoint between xxx and xxxxx is 0.14¢ (rounded to the nearest hundredth

cent). Accordingly, in the absence of persuasive contrary evidence, the Panel concludes

that in the hypothetical marketplace, the Section 114(f)(2) performance royalty rate

which willing buyers and willing sellers would normally have negotiated is 0.14¢ per

performance for basic (business-to-consumers) webcasting services.

2. The Radio Retransmissions Rate

The Panel applies the same methodology to determine the appropriate RR rate.

Our analysis implies an actual willing buyer/willing seller marketplace rate somewhere

between xxxxx (the effective rate actually negotiated and paid by Yahoo! for the first xxx

xxxxx IO and RR performances) and xxxx (the artificially low RR rate). In the absence

of compelling reasons to do otherwise, we similarly select the midpoint 54 of 0.07¢ (again

rounded to the hundredth cent) as the rate which most clearly reflects the performance

 

54 The reader should not infer from this methodology that Yahoo! and RIAA necessarily agreed to

artificially lower the RR rate by 50% and concomitantly raise the IO rate proportionally. Our

analysis takes account of the other factors identified in addition to the artificiality factor. In each

instance we select midpoints because we are unaware of record evidence that would lead us to

another result.
78

rate which willing buyers and willing sellers would have commonly negotiated in the

hypothetical marketplace.55

J. SECTION 114(f)(2) RATES FOR OTHER WEBCASTING SERVICES

We have determined the Section 114(f)(2) performance rates for basic business to

consumer (“B2C”) webcasting services and for webcasting services that retransmit radio

broadcasts. In this section we consider rates for other categories of webcasting

services.56

1. “Business to Business” Webcasting Services (“Syndicators”)

RIAA claims that business to business (“B2B”) webcasting services, where

transmissions are made as part of a service that is syndicated to third party web sites,

should pay a higher rate than B2C webcasters. The syndicator creates “branded” internet

radio-like stations for third-party sites that appear to the user as, for example, “Eddie

Bauer Radio” or “Bolt Radio.” See Griffin W.D.T. 16-17; Tr. 1284-92 (Griffin), 7477-79

(Moore). The programming can be customized to the demographics of the sites’

customers. See Tr. 14069-77 (Marks); Marks W.D.T. 16-17. And due to the limitation

 

55 The Panel notes that the rates we have determined (0.07¢ for radio retransmissions and 0.14¢

for internet-only transmissions) are quite close to the rates (xxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxx. See RIAA Ex. 137 DP at N945-46. At other points in the negotiation, RIAA also

indicated xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx (RIAA Ex. 137 DR at N11721,

14544) xxxxxxxxxxxxxxxxxxx (see id. at N11732). This evidence suggests that our rates are well

within a reasonably narrow range which includes rates xxxxxxxxxxxxxxxxxxxxxxxx.

56 Of course, there are numerous possible categories of webcasting services -- limited only by

one’s imagination. In this discussion, we address only categories for which we believe the record

arguably supports a separate rate.
79

set forth under Section 114(j)(6),57 some third-party sites might not be eligible to offer

webcasting without the services of a syndicator. See Tr. 14069-77 (Marks). In many

respects, the syndicator is analogous to the business establishment music services that

provide music in traditional brick and mortar stores.58 See RIAA PFFCL ¶ 282; Moore

W.R.T. 2. RIAA cites Websound, MoodLogic and OnAir.com as RIAA licensees that

exemplify syndicators. See RIAA PFFCL ¶ 285.

Webcasters respond that, regardless of the type of service, “the nature of the

public performance is the same; and the value of the performance does not change merely

because of the technology of the webcaster or the fact that the sound recording is heard

when it is accessed at a third-party web site rather than the originating webcasters’ web

site.” Webcaster PFFCL ¶ 297 (emphasis added). In any event, the central question is

whether the record supports a higher rate for B2B services based upon an application of

the willing buyer/willing seller standard. We conclude that it does not.

We acknowledge that a few syndicators (that syndicated or intended to in the

future) signed license agreements with RIAA containing rates above the predominant rate

of 0.4¢. See RIAA Ex. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

However, a far greater number of agreements that permit syndication provide rates near

or below the predominant 0.4¢ rate. See RIAA Exhibit xxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

 

57 Under the definition of “eligible nonsubscription transmission,” the primary purpose of the

transmitting service must be to provide to the public “audio or other entertainment

programming.” 17 U.S.C. § 114(j)(6).

58 Interestingly, business establishment music services are exempt from paying any performance

fees. See 17 U.S.C. § 114(d)(1)(C)(iv).
80

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxx. Of course, the agreement worthy of the most weight is the

Yahoo! license. In sum, we find insufficient record evidence to support a separate rate

for syndicator services and conclude accordingly that such performances shall be at a rate

of 0.14¢ per performance.

2. “Listener-Influenced” Services

RIAA maintains that so called “listener-influenced” services are ineligible for the

Section 114 statutory license and urges the Panel not to set a royalty rate for such

services. RIAA PFFCL ¶ 226. However, if the Panel feels compelled to do so, RIAA

submits that the rate should be set at 0.6¢ per-performance. RIAA PFFCL ¶ 227.

RIAA defines listener-influenced services (also referred to as “personalized

services”) as “those that allow their listeners some control over the programming they

receive through the rating of artists, albums or songs, as well as providing listeners with a

skip forward to the next song.” RIAA PFFCL ¶ 286. Although the listener will not know

which song will be coming next, by supplying ratings and using the skip feature, the

listener has more control over the songs heard than a listener of a basic genre-based

webcasting service. See id. Because RIAA deems most listener-influenced services as

ineligible for the Section 114 statutory license (see notes 1 and 15, supra), and because

RIAA is not permitted to negotiate as a common agent for non-statutory Section 114
81

licenses, it does not rely upon the 26 agreements as benchmarks for setting rates for such

services. Rather, it relies upon several agreements between record companies and nonDMCA-compliant services.

The Panel’s sentiments respecting services that offer listener influence are similar

to those expressed respecting syndicators. While RIAA may believe that listenerinfluenced services displace demand for sales of their phonorecords (see e.g., Tr. 1508-12

(Griffin)), there is no empirical evidence before us to confirm this belief. And RIAA’s

reliance upon agreements with non-DMCA compliant license agreements is unavailing.

By definition, these license agreements grant rights beyond those conferred by the

relevant statutory license. One would expect a rate premium for such additional rights.

We also note that RIAA has reached agreements with several licensees that offer listener

influence at rates consistent with its predominant rate (without premium). See e.g., RIAA

Exhibit xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Tr. 9354-57 (Marks), xxxxxx

xxxxxxxxxx.

Finally, the Panel cannot imagine how one would meaningfully draw the line

between those services eligible for the basic webcasting rate and those that would be

subject to a separate rate for listener-influenced services. Indeed, neither side has

adequately described such a line of demarcation. We conclude that so long as a service

complies with, and is deemed eligible for the statutory license, it should not pay a

separate rate based upon listener influence.59

 

59 Of course, we do not interpret the Librarian’s Order of July 16, 2001 as compelling us to set a

separate rate for listener-influenced services if we conclude, as we have, that the record does not

support one.
82

K. ROYALTY RATES FOR COMMERCIAL BROADCASTERS

1. Introduction

Commercial broadcasters are FCC-licensed radio stations. Some currently

operate, and others contemplate operating, services which simultaneously stream

(retransmit) their over-the-air broadcasts via the internet. These streamed retransmissions

are known as “simulcasts.” See, e.g., Proposed Definitions of RIAA, February 12, 2002 at

16. Some broadcast stations also offer “archived” programming, “side channel”

programming, and “substituted” programming. See Section K.5. infra. The Panel must

determine what rates to set for these various transmissions.

2. Procedural History

As previously noted, this proceeding was suspended for the period November 9,

2001 through December 2, 2001, to allow the parties an opportunity to pursue additional

settlement negotiations. See Section II.D., supra. The negotiations resulted in a

confidential settlement agreement between NPR and RIAA, and an accord respecting the

great majority of the non-rate terms. See id. Commercial Broadcasters also reached a

tentative settlement with RIAA. However, the settlement was contingent upon the agreed

rates remaining confidential until after the Panel rendered its Report respecting nonbroadcasters. See Request to Withdraw Issues from CARP, December 14, 2001. This

contingency presented special challenges because, unlike the NPR/RIAA private

agreement, which settled all matters among a finite class of services, the

broadcaster/RIAA agreement affected only the signatories. See Order of December 20,

2001. The Panel remained obligated to set rates and terms for non-signatory

broadcasters. Despite multiple, creative attempts by the Copyright Office and the parties
83

to fashion a mutually acceptable procedure that preserved the required confidentiality, no

agreement could be concluded. Accordingly, the Librarian directed the Panel to

determine rates and terms for Commercial Broadcasters. See Order of January 7, 2002.

3. Positions of the Parties

RIAA urges the Panel to adopt the very same rate for commercial broadcaster

streamers as the rate it proposes for B2C IO webcasting. See RIAA PFFCL

(Broadcasters) ¶ 1. RIAA maintains that no record evidence leads to a different result,

and that the Services’ fee model should be rejected for all of the reasons previously

discussed. See id ¶¶ 1-11.

Broadcasters note that broadcasters represent more than 1500 of the 2300 entities

which filed Notices of Intent to use the statutory license. See Broadcasters PFFCL ¶ 33;

Marks W.D.T. n.2. They argue that the fact that RIAA was able to negotiate agreements

with only 26 webcasters, but with none of the 1500 broadcasters, demonstrates that

broadcasters and webcasters represent different groups of “willing buyers,” which would

negotiate different rates in the marketplace. See Broadcasters PFFCL ¶¶ 27, 33; Tr.

7660-61 (S. Fisher).

4. Determination of Commercial Broadcaster Rates

With respect to webcasters, we previously stated that if we can observe

agreements that willing buyers and willing sellers actually negotiated in the relevant

marketplace, we would generally expect their negotiated rates to already reflect the

parties’ joint perceptions of the various factors identified in Sections 114(f)(2)(B) and

112(e)(4). In that event, no further rate adjustment would generally be required to
84

determine a willing buyer/willing seller rate. Although no party has adduced a single

digital sound recording performance license agreement with any radio broadcaster, the

Yahoo!/RIAA agreement entails retransmissions of the same types of radio stations

signals, albeit by a third party – Yahoo!. The Panel has already determined that the

typical willing buyer/willing seller rate for that RR rate is 0.07¢ per performance. The

Panel must now decide whether the record suggests a different rate for retransmission of

an identical radio signal by the station itself -- rather than by a third party. We find the

record (and consideration of the statutory factors) utterly devoid of evidence implying a

higher rate and insufficient to warrant a lower rate.

Regarding the displacement of record sales, Section V.I. above discusses the

extensive record evidence regarding the promotional effect of radio airplay. Some record

evidence also suggests that record companies are less fearful of simulcasts by both

broadcasters and third parties -- as contrasted with conventional multi-genre webcasting.

See e.g. Tr. 1112-15 (Katz) (these streaming activities constitute the “safer end” of the

spectrum warranting a lower rate). This implies a lower rate than the webcaster

performance rate, for both broadcasters and third party retransmitters. However, we find

no record evidence suggesting a different rate as between broadcasters and third party

retransmitters.

Though not explicitly argued by any party, several other rational arguments could

be advanced in favor of a lower rate for broadcasters vis-à-vis those third-party

retransmitters which also aggregate stations (such as Yahoo!). First, third-party

aggregators like Yahoo! aggregate hundreds of radio stations on their portal sites. This

arguably provides the listener with a more satisfying listener experience than derived
85

from a traditional broadcast radio dial. One might then contend that third-party

aggregators derive more value from the sound recordings than do broadcasters that

merely retransmit their own signals. Second, aggregators might arguably pay more to

buy access to new, wider audiences than broadcasters would pay to stream to people who

were already their listeners. And third, aggregators who have to pay a performance

royalty to stream to all of their listeners might arguably pay more than broadcasters who

have never paid any performance royalty during decades of broadcasting experience. In

the final analysis, however, there is no record basis to quantify any possible difference in

value due to these factors. Stated differently, the Panel does not and cannot know

whether these arguments would impact the rate negotiated by a willing buyer and willing

seller, or to what degree.

RIAA continues to press its contention that the Yahoo! RR rate is an

inappropriate benchmark because it reflected alleged legal uncertainties surrounding the

retransmission of broadcast signals. See RIAA PFFCL (Broadcasters) ¶ 14. We have

already addressed this issue and confidently concluded that these alleged “exemptions”

were “red herrings” that did not affect the negotiated rates. See Section V.G.7.c. and text

accompanying n.44 supra. If at some future date, broadcasters were to prevail on their

150-mile exemption claim, we assume the courts would fashion a method of

appropriately reducing the royalty to exclude listeners within that area. Contrary to

RIAA’s claim (see RIAA PFFCL (Broadcasters) ¶ 18), such reduction would not

constitute a “double counting of the 150-mile exemption” because we have made the

factual finding that the alleged exemption was not factored into the Yahoo! RR rate. Id.
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In sum, the Panel finds no reason to set a different rate for broadcasters (that

simulcast their own signals) than for third parties that retransmit the same signals on

behalf of the broadcasters. Accordingly, we determine the willing buyer/willing seller

commercial broadcaster rate also to be 0.07¢ per performance.

5. Archived Programming, Side Channels, and Substituted Programming

A broadcaster’s steaming activity may involve making available to listeners

previously-aired (“archived”) radio programming, internet-only programming on their

web sites (“side channels”), and/or “substituted programming” that is streamed whenever

a broadcaster lacks authorization to stream a portion of the over-the-air programming.60

Cf. Tr. 8556-67 (Davis); 5467-68 (Halyburton); RIAA Exhibit 140 DP-X.

The record is devoid of direct evidence of the willing buyer/willing seller rate for

archived radio retransmissions. But the Panel must resolve which rate, of those we have

already determined, should apply to these retransmissions – the 0.07¢ RR (and

commercial broadcaster) rate, the 0.14¢ IO rate, or some other rate.

As part of their contingent settlement agreement discussed above, Broadcasters

and RIAA evidently resolved all issues respecting archived programming, side channels,

and substituted programming. See Proposed Terms filed on December 20, 2001, at ¶ 1(e)

(setting forth definitions that would apply to the settlement). Broadcasters assert that,

although the settlement has not been effectuated, the jointly submitted, proposed terms

remain binding on all parties. See Broadcasters PFFCL ¶ 1, n.1. And these agreed terms

contain a definition of AM/FM streaming that includes transmissions of certain archived

 

60 For example, a professional sports franchise might conceivably license a radio station the rights

to broadcast an event over-the-air, but withhold the rights to simulcast the event over the Internet.
87

programming, side channel programming, and substituted programming. See id; Proposed

Terms of December 20, 2001, at ¶ 1(e). Accordingly, Broadcasters implicitly claim that

these transmissions should be encompassed within the royalty rate set for commercial

simulcast transmissions. See id. RIAA vehemently disagrees and contends that that

definition was rendered moot when the settlement agreement was discarded. See

Copyright Owners Submission Explaining Proposed Terms of February 1, 2002, at 2-4.

The Panel fully agrees with RIAA. The definition of AM/FM streaming is so

inextricably linked to the contingent settlement, it has lost all value for purposes of ratesetting. See also Section VII.C.1., infra.

In accordance with our previously articulated reasoning, the best benchmark for

determining royalty rates for the transmission of archived programming, side channel

programming, and substituted programming, is the Yahoo!/RIAA license agreement.

That agreement provides compelling record evidence of two willing buyer/willing seller

rates: (1) a rate for internet retransmissions of AM/FM broadcasts (RR rate); and (2) a

rate for all other internet transmissions. The former is significantly lower than the latter.

This apparently reflects marketplace assessment of the various promotion and

substitution effects, along with myriad other factors.

The Yahoo!/RIAA license agreement defines a radio retransmission performance

as xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx RIAA Ex. 75

DR at §1.16. The term “retransmission” is not further defined. Therefore, in the absence

of contrary record evidence, the Panel adopts the definition of that term as set forth in 17

U.S.C. §114, namely “a further transmission of an initial transmission ... if it is

simultaneous with the initial transmission.” 17 U.S.C. § 114(j)(12) (emphasis added).
88

Accordingly, absent contrary evidence, the Panel concludes that the Yahoo! RR

rate applies only to simulcast transmissions and does not include archived transmissions,

side channel transmissions, or transmissions containing substituted programming.

Consistent with this approach, the Panel declines to include these transmissions within

the 0.07¢ RR rate adopted for commercial broadcaster retransmissions. As RIAA

correctly maintains, archived transmissions, side channel transmissions, and

transmissions containing substituted programming, are essentially webcasting. See RIAA

PFFCL (Broadcasters) ¶¶ 21-25; Proposed Definitions of RIAA of February 12, 2002 at

19. The Panel finds no record evidence warranting a separate rate for these transmissions

and, therefore, adopts the 0.14¢ IO rate.

Indeed, the Panel determines that the 0.07¢ performance rate applies only to

simulcast transmissions. All other transmissions are subject to the 0.14¢ performance

rate. 

L. ROYALTY RATES FOR NON-CPB AFFILIATED,

 NON-COMMERCIAL BROADCASTERS

At the outset of this Report, we noted that NPR has reached a private settlement

with RIAA respecting webcasting by public broadcasters represented by NPR. See n.2,

supra. However, NPR represents only itself, its member radio stations, and non-member

radio stations which are eligible to receive federal funding from the Corporation for

Public Broadcasting (“CPB”). See Murdoch/Woodbury W.D.T. 2. NPR does not

represent the universe of non-commercial radio stations that are non-CPB affiliated.
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Accordingly, the Panel must decide whether the existing record warrants a separate rate

for webcasting by these non-commercial radio stations.61

Applying the same commercial broadcaster rate to non-commercial entities

affronts common sense. A predecessor panel observed that, while commercial

broadcasters can pass along some portion of their costs to their advertisers, “[n]o

comparable mechanism exists for Public [non-commercial] Broadcasters.” RIAA Exhibit

220 DP-X at 24 (CARP Report adopted by Library, Noncommercial Education

Broadcasting Rate Adjustment Proceeding, 63 FR 49823). Unlike commercial

broadcasters, “programming costs are not automatically accommodated through market

forces. Contributions from government, business, and viewers remain voluntary.” Id.

“For these reasons, commercial rates almost certainly overstate fair market value to

Public Broadcasters.” Id. That panel concluded that “commercial license rates can not

appropriately be used as a benchmark to determine Public Broadcasters’ rates.” Id. at 29

(emphasis in original).

Unfortunately, determination of the willing buyer/willing seller fees for non-CPB

affiliated, non-commercial radio stations (“non-CPB broadcasters”) presents an

extraordinary challenge. Despite admonitions to all counsel from the Panel as early as

September 7, 2001 (well prior to the rebuttal phase), the record remains virtually barren

respecting such broadcasters. See Tr. 9009-13. The record tells little about those non-

 

61 Non-commercial radio stations are those that meet the definition of public broadcasting entities

found at 37 C.F.R. § 253.2.
90

CPB broadcasters that are represented by the NRBMLC,62 and virtually nothing about

those that are not.63

NRBMLC struggles mightily to quantify a proposed rate founded in record

evidence. It urges the Panel to base non-commercial broadcaster rates upon the flat fees

currently paid to the PROs for their over-the-air musical works performance rights, as set

forth in 37 C.F.R. §§ 253.5(c), 253.6(c). See NRBMLC PFFCL ¶¶ 20-24. Putting aside

our hesitancy to utilize over-the-air musical works performance rates as a proxy for

webcasting sound recording performance rates, those fees were settled pursuant to joint

proposals that are not part of this record. We do know, however, that those rate proposals

were

made on a nonprejudicial and nonprecedential basis. Therefore, the

Librarian recognizes that the joint proposals do not reflect any assessment

by any of the parties of the absolute or relative value of the right of the

performance of music in the ASCAP, BMI or SESAC repertory by college

radio stations .... [and] community radio stations.

62 Fed. Reg. 63502, 63504 (December 1, 1997). See also RIAA Exhibit 220 DP-X at 21-

22 (CARP Report adopted by Library, Noncommercial Education Broadcasting Rate

Adjustment Proceeding, 63 FR 49823) (Panel concluded that voluntary agreements

containing “no-precedent clauses” are highly suspect as rate benchmarks, requiring an

examination of the “totality of circumstances”). Absent a rigorous examination of the

 

62 A party to this proceeding, the National Religious Broadcasters Music License Committee

(“NRBMLC”), apparently represents a certain subset of the non-CPB broadcasters (although the

record does not reflect the size of that subset), as well as many commercial broadcasters. In that

capacity, they filed Proposed Findings of Fact and Conclusions of Law (“NRBMLC PFFCL”)

concerning this issue. See NRBMLC PFFCL ¶ 1.

63 The only witness presented by NRBMLC was Joe D. Davis, Senior Vice President for Salem

Communications -- a very profitable commercial company traded on the NASDAQ exchange that

owns 85 radio stations, a network, a media company, and an internet company. See Tr. 8540-44,
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agreements that led to adoption of the rates set forth in Part 253, supra, this Panel must

decline to adopt those rates as a benchmark.

NRBMLC attempts to bolster its proposal by citing the testimony of Dr. Murdoch,

who testified on behalf of NPR. At the request of the Panel, Dr. Murdoch reluctantly64

attempted to establish the ratio of fees currently paid by NPR to the PROs, as compared

to the fees that NPR stations would pay the PROs if they were commercial radio stations.

See Murdoch W.R.T. 6-10. Dr. Murdoch concluded that if the Panel insisted upon using

“a commercial fee rate expressed on a revenue basis ... as a starting point for setting

[NPR] website fees, it would be appropriate...to reduce the commercial fee rate by 90%

to determine the fee rates to be paid by [NPR] webcasters.” Id at 9 (emphasis added).

Again putting aside the Panel’s serious concerns about (1) using over-the-air musical

works performance rates as a proxy for webcasting sound recording performance rates,

and (2) using NPR as a proxy for non-CPB Broadcasters, Dr. Murdoch candidly

conceded other problems that render her strained conclusion “fraught” with problems.

See id at 9-10. For example, she explains that, should the Panel set commercial rates on a

percentage of revenue basis (which we have not), identifying a public radio station’s

revenue attributable to music webcasting would be “exceedingly difficult.” Id.at 9. And

 

8574-84. Davis works with Salem’s radio stations -- not the internet company -- and his

testimony about non-commercial stations was primarily anecdotal. See Tr. 8542, 8554-55.

64 Citing the Noncommercial Education Broadcasting Rate Adjustment Proceeding CARP, Dr.

Murdoch opined that “the complexities of deriving fees for public broadcasters from benchmark

fees for commercial broadcasters are not trivial, and are best avoided in situations where a public

broadcasting benchmark exists.... Nonetheless, in response to the Panel’s specific request, we

have identified the nature of the adjustments that the Panel would need to recognize to derive a

fee for public radio webcasters from a commercial webcaster benchmark.” Murdoch W.R.T. 7.
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if the Panel adopted a per-performance fee metric for commercial broadcasters (as we

have),

the adjustment to arrive at a [per-performance rate]...for public radio

websites is less clear due to the limitations of information available to us. A

problem in identifying the correct adjustment factor arises because the

discount rate that we were able to calculate compounds a music use

adjustment factor and a noncommercial adjustment factor. The per-

[performance] ... rate requires the adjustment for the noncommercial nature

of public radio websites but does not require the adjustment for public

radio’s less-intensive music use. The Panel would find it necessary to

deconstruct the 90 percent discount factor we have identified.

Id. at 10. Moreover, it appears that the revenue figure used in Dr. Murdoch’s calculations

was improperly inflated by the inclusion of revenue from non-CPB broadcasters and by

revenue of NPR itself (which is not a radio station entity). See RIAA RPFFCL (re nonCPB broadcasters) ¶ 17. See also RIAA PFFCL (re Broadcasters) ¶ 42. In sum, the Panel

must reject both approaches advanced by NRBMLC.

RIAA’s methodology also suffers infirmities. Absent record evidence supporting

a particular rate for non-CPB broadcasters, RIAA “borrowed a ratio” from the

Noncommercial Education Broadcasting Rate Adjustment Proceeding CARP Report,

supra. See RIAA PFFCL ¶¶ 237. RIAA maintains that the panel awarded ASCAP and

BMI approximately one-third of the sum they had requested as a royalty fee for the

Section 118 public broadcasting compulsory license, and ASCAP and BMI had based

their request on royalties paid by commercial broadcasters. Based upon this ratio, RIAA

is “willing to offer” non-CPB broadcasters a two-thirds discount from the commercial

broadcaster rate.65 See RIAA PFFCL (re Broadcasters) ¶ 44. Otherwise, RIAA contends,

 

65 The RIAA offer is silent as to NRBMLC’s request for the fee to include (1) substituted

programming (where the station lacks the rights to transmit certain over-the-air programming via

the internet), (2) previously aired archived programming, and (3) up to two side channels
93

the record reflects that non-CPB broadcasters “should pay the same royalty rates that

apply to ... commercial broadcasters.” Id. Given the state of the record, the Panel

reluctantly would have to agree. Absent record evidence to support a differentiated rate,

should the Panel decline RIAA’s offer, non-CPB broadcasters would be subject to the

commercial rate.

Accordingly, rather than subject the non-CPB broadcasters to the commercial

rate, the Panel hereby accepts RIAA’s invitation66 to set a rate for non-CPB broadcasters

at a rate which is one-third of the commercial broadcaster67 rate of 0.07¢ perperformance. Rounded to the nearest hundredth of a cent, the derived rate equals 0.02¢

per-performance.

In accordance with the Panel’s findings respecting the commercial broadcasters,

we determine that this rate of 0.02¢ should not apply to archived radio broadcast

programming subsequently transmitted via the internet. Nor should it apply to

transmissions of substituted programming. The 0.02¢ rate applies only to simulcasts --

retransmissions under 17 U.S.C. § 114(j)(12). However, consistent with RIAA’s one-

 

consistent with and in furtherance of the educational purpose of the station. See NRBMLC

PFFCL ¶ 40; RIAA PFFCL (re Broadcasters) ¶¶ 44-52.

66 We assume that in a willing buyer/willing seller negotiation, the negotiated rate would be no

higher than the rate “offered” herein by RIAA.

67Curiously, one week prior to the deadline for submission of this Report, RIAA asserted that

their offer was not intended to be interpreted as one-third of the rate determined by the Panel for

commercial broadcasters, but rather “one-third of the rate adopted for Webcasters.” Proposed

Definitions of February 12, 2002 at 14, n.6. This claim defies logic. Both the Panel and the

Services plainly understood the offer as referring to the commercial broadcaster rate. See id.

Indeed, we invite RIAA to review its initial offer: “Copyright Owners are willing to accept a rate

for Noncommercial Broadcasters that is no less than one-third of the rate paid for commercial

broadcasters.” Reply of Copyright Owners and Performers to Non-CPB Entities (December 18,

2001) at 3 (emphasis added). The Panel declines to modify its position based upon RIAA’s

eleventh hour assertion.
94

third offer, and its implicit recognition that non-commercial broadcasters should not be

subject to commercial rates, transmissions of archived programming and substituted

programming shall be subject to a rate of one-third the commercial IO rate of 0.14¢.

Again rounded to the nearest hundredth of a cent, the derived rate equals 0.05¢ per

performance.

Respecting side channel transmissions, these obviously do not qualify for the

simulcast rate. In accordance with our reasoning, these transmissions would also be

subject to the 0.05¢ per performance rate (one-third of the commercial IO rate of 0.14¢).

However, the Panel accepts as appropriate the limitations proposed by NRBMLC. See

n.65 supra. These limitations were proposed by NRBMLC (see NRBMLC PFFCL ¶ 40)

apparently in recognition that allowing unlimited side channels could permit non-CPB

broadcasters to essentially become commercial webcasters.

In summary, the Panel determines the performance royalty rate for non-CPB

broadcaster retransmissions (simulcasts) to be 0.02¢ per performance. The rate for

transmissions of archived programming substituted programming, and transmissions of

one or two side channels of programming, consistent with the educational mission of the

station, shall also be 0.05¢ per performance. The rate for transmissions on any side

channels beyond the two shall be the same as the commercial non-simulcast rate, i.e.,

0.14¢ per-performance.

M. THE MINIMUM FEE FOR WEBCASTING SERVICES

Both Sections 114(f)(2)(B) and 112(e)(4) direct us to set a minimum fee for each

type of service. Because the Panel is setting a Section 114 rate (and concomitantly a

Section 112 rate) that is based upon the number of performances that a service transmits,
95

rather than a percentage of revenues generated by the service, the issue of minimum fees

is of lesser significance. See Marks W.D.T. 17-18. RIAA was rightfully concerned that a

start-up service with little revenues could transmit a large volume of performances, but

pay very little in royalty fees, if fees were based upon a percent-of-revenue model. See id.

The Panel concurs with the Services that one purpose of the minimum fee is to

protect against a situation in which the licensee’s performances are such that it costs the

license administrator more to administer the license than it would receive in royalties. Cf.

Jaffe W.R.T. 31; Tr. 12387 (Jaffe). Another arguable purpose is to capture the intrinsic

value of a service’s access to the full blanket license, irrespective of whether the service

actually transmits any performances. See RIAA RPFFCL ¶ 249. Whichever the purpose

of the minimum fee requirement, the Panel believes that the lowest fee negotiated by

RIAA under the per-performance fee model would necessarily cover the perceived

administrative costs and the value for access to the blanket license. This belief is

premised upon one fundamental assumption -- that a sophisticated and experienced

negotiator, such as RIAA, would not negotiate a minimum fee that would expose it to a

loss. We are quite comfortable with this assumption. Accordingly, we adopt the

minimum fee prescribed in the xxxxxxxxxxxxxxxxxxxx license agreement of $500 per

annum,68 which covers both the Section 114 license and the Section 112 license. See

xxxxxxxxxxxxxxx. Our reliance upon the minimum fee prescribed in the

xxxxxxxxxxxxx license agreement is in no way inconsistent with our prior decision to

accord virtually no weight to that agreement with respect to the per performance fee. As

previously explained, xxxxxxxxxxxxx is one of a large number of licensees that never

 

68 This minimum fee appears to be generally comparable to the combined minimum fees set by

other collection agencies such as the PROs. See Webcasters PFFCL ¶¶ 363-64.
96

paid royalties pursuant to the performance rate structure. It merely paid pursuant to the

minimum fee requirements.

Accordingly, we apply this minimum fee to all webcasting services. Each

statutory licensee is required to pay a minimum license fee of $500, payable as a nonrefundable advance against future royalty fees in that year, due upon the first monthly

payment of each year. And in accordance with the xxxxxxxxxxxxx license agreement,

the minimum fee shall not be prorated based upon the date paid, but shall be due in full

for any calendar year in which a service holds a statutory license.

N. SECTION 112(e) EPHEMERAL RECORDING

 RATES FOR WEBCASTING SERVICES

1. The Nature of Ephemeral Copies

Ephemeral copies of digital recordings, as addressed in §112 of the Copyright

Act, refer to temporary copies of sound recordings made to enable or facilitate the digital

transmission of such recordings. These may include, for example, multiple copies made

to sit on multiple hard drives or servers, or copies configured differently to facilitate

streaming at different bitrates and “codecs.” Zittrain W.D.T. 2-6, 12; Tr. 4588 (Porteus);

Porteus W.D.T. 12; Pearson W.D.T. 9-10; Wise W.D.T. 9; Juris W.D.T. 7; Roy W.D.T.

8; Moore W.D.T. 5; Tr. 6555-56 (Jaffe). Webcasters and broadcasters may use a single

ephemeral copy in the streaming process without charge. 17 U.S.C. §112(a)(1). The

creation or use of multiple ephemeral copies, however, is subject to a statutory license.

One part of this Panel’s responsibility is to set a royalty rate for the use of multiple

ephemeral copies by webcasters and broadcasters. §112(e)(4). The royalty rate for the
97

use of ephemeral copies by Business Establishment services is determined in Section VI

of this Report.

The record establishes that ephemeral copies are integral to most digital

performance streaming, but the testimony is contradictory regarding whether ephemeral

copies have independent value apart from, or because of, their use in the streaming

process.

2. The Value Of Ephemeral Copies

(a) The Services’ View

As throughout this proceeding, the Panel is offered two contrasting views

regarding what the appropriate analysis should be. The Services urge the Panel to adopt

economic analysis reasoning, primarily by Professor Jaffe, while the Copyright Owners

and Performers urge that the appropriate guidance is to be found in the 26 agreements

negotiated between RIAA and its licensees.

Services witnesses argue that, because the only purpose of ephemeral copies is to

facilitate licensed public performances, they have no economic value separate or distinct

from the value of the performances they effectuate. Jaffe W.D.T. 52-54; Tr. 6556 (Jaffe).

Because the payment of the performance royalty has already compensated the copyright

owner for the full value of the public performance, according to this logic, paying any

additional amount for the ephemeral right would constitute an inappropriate double

payment. Tr. 3904 (Fisher). Arguing by analogy, ephemeral copies should be seen as

similar to car keys, which are used to start and operate an automobile. See Jaffe W.D.T.

54. Although they are necessary for operation (except possibly for “hot wire”

specialists), their “value” is included in the overall purchase price paid for the car.
98

Similarly, appropriate royalty payments for performance rights include payment

for incidental ephemeral rights. Designating any separate value for an ephemeral right is

thus arbitrary, and any amount so set should be subtracted from the royalty rate for the

performance right in order to keep the combined cost of the two rights the same. Jaffe

W.D.T. 52-54; Tr. 6556 (Jaffe). Again by analogy, if a $10 price tag were to be attached

to car keys, the price of the automobile should be reduced by $10 to keep the total price

constant. Jaffe W.D.T. 54; see also Tr. 6556-57, 12700-01 (Jaffe); Services RPFFCL ¶27.

(b) The Copyright Office View

Advocates of the “car keys” analogy urge the Panel to follow the August 2001

Report of the U.S. Copyright Office, issued during the pendency of this proceeding,

which characterized §112(e)’s imposition of a separate ephemeral rate as an “aberration.”

This Report states: “we [see] no justification for...the imposition of a royalty obligation

under a statutory license to make copies that have no independent economic value and are

made solely to enable another use that is permitted under a separate compulsory license.”

Jaffe W.R.T. Ex. 6, U.S. Copyright Office, DMCA Section 104 Report at 114 fn. 434

(August 2001). The Copyright Office also advocated this view in 1998. Id.

(c) The Congressional View

Although the Copyright Office did urge this policy position in 1998, both the text

and the legislative history of §112 indicate that Congress declined to adopt it. 17 U.S.C.

§112(e); DMCA Conf. Rpt. 89-91; DMCA Section-by-Section Analysis 52-53, 61-62.

Whatever the Panel’s private views regarding the merits of this policy debate (and the

Panel affords great weight to the views of the Copyright Office professionals who have

developed considerable expertise in these matters), this policy determination must be
99

made by the Congress, not by the Panel. Unless and until Congress amends the current

statute, the Panel’s duty is clear: the Panel’s responsibility is to follow the current

Congressional mandate set forth in § 112(e)(4) and determine a separate rate for

ephemeral copies.

(d) Evidence from the Marketplace

The record also establishes another reason to guide Panel analysis to this

conclusion. In mandating a separate ephemeral compulsory license in §112(e)(4),

Congress established the willing buyer/willing seller measure as the standard to be

followed, and the Copyright Office has affirmed that “willing buyer/willing seller” is the

standard this Panel must apply in determining an ephemeral royalty rate. July 16, 2001

Order at 5. It would be one thing if record evidence established that buyers of privatelynegotiated licenses had refused to pay any separate ephemeral royalty or, if they had, had

insisted that their performance royalty be reduced by the amount of their ephemeral

royalty. However, as discussed below, record evidence before the Panel establishes the

contrary: separate ephemeral rates, above and beyond the performance royalty were, in

fact, often agreed to in the 26 RIAA statutory licensing agreements. Thus, whatever the

merits of the theoretical economic analysis, actual actors in the marketplace have

demonstrated behavior which matches the standard that Congress and the Copyright

Office have indicated must be applied. For this reason, we turn next to an examination of

the 26 agreements as they pertain to ephemeral royalty rates.

3. Four Measures from the 26 Agreements

In Section V.G. above, we explained why we have concluded that 25 of RIAA’s

26 license agreements are entitled to little weight in determining the predominant
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performance royalty which willing buyers and willing sellers would agree to in the

hypothetical marketplace we must replicate. The same infirmities greatly limit the

usefulness of these agreements in determining ephemeral royalty rates. Nevertheless, the

Panel considers it appropriate to look at these 26 agreements in order to see if they reveal

a clear and consistent pattern. Regrettably, examination of the RIAA’s initial 26 license

agreements reveals an inconsistent, rather than a consistent, pattern.

 Overall, the 26 agreements fall into four categories. Two set ephemeral rates as a

percentage of gross revenue. One provides for a flat dollar amount payment. The largest

single group indicating any rate (eight in number) provides for an ephemeral rate as a

percentage of the performance rate amount. And a fourth group (of fifteen) is silent

regarding ephemeral copies and provides no express ephemeral rate.

Percentage of Overall Revenue. Two of the initial 26 negotiated agreements

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx calculated

ephemeral rates based on overall revenue (xxx in the first and xxxxx for a combined

performance/ephemeral rate in the second). See RIAA Exs. xxxxxxxxxxxxx. Compared

to the other 24 agreements, these two are the least probative because their percentage-ofoverall-revenue basis was used only twice and is not now urged by any party as a formula

for the webcasting ephemeral rate to be set by this Panel.

Flat fee. This second type of ephemeral rate agreement (with Yahoo!) resulted in

the largest ephemeral royalty amount paid under any of the 26 agreements and was

related to the largest number of performances. The Yahoo! agreement is calculated on

the basis of a flat fee, with a payment of xxxxxxxx for the initial time period (through 12-

31-00) and an additional xxxxxxx for each 12-month renewal. See RIAA Ex. 75 DR at
101

§§ 3.1, 3.4. The total xxxxxx ephemeral royalty amount paid, when divided by Yahoo!’s

total non-ephemeralperformance royalty payment of xxxxx million, Panel Rebuttal

Hearing Ex. 1 (Mandelbrot W.R.T. 7), results in an effective royalty rate of 8.8% paid

under this agreement. As the agreement which represents both the ephemeral royalty for

the largest number of performances and the largest ephemeral amount paid, this Yahoo!

ephemeral rate, like its per performance rate, is entitled to considerable weight.

Percentage of Performance Royalty Amount. The third category of ephemeral

royalty rates is found in eight agreements, which provide for express ephemeral rates of,

or calculable to be, 10%. The first of these (xxxxxxxxx) occurred in August 2000,

contemporaneously with the Yahoo! agreement; the remainder occurred over the next

eight months. The three which can be calculated to be 10% are xxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxx, and xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. See

also RIAA Exs. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Absence of Indication. Having concluded that the soundest basis for determining

what willing buyers would pay willing sellers for an ephemeral rate would be to look at

the 26 actual marketplace agreements, the Panel is faced with the anomaly that the

majority (fifteen) of these 26 do not state any ephemeral royalty rate.69 Based upon a

careful examination of the agreements themselves, as discussed previously in Section V.

G., the Panel concludes that the reason for this silence is that these agreements do not, in

 

69 Clearly, the RIAA characterization that “Nearly all of the RIAA license agreements include

the 10% surcharge for the making of ephemeral recordings under the Section 112(e) compulsory

license,” RIAA PFFCL ¶245, is decidedly wide of the mark.
102

fact, convey ephemeral rights to the licensees. Unlike the Yahoo! agreement and others

which are typically labeled “WEBCASTING PERFORMANCE AND EPHEMERAL

LICENSE AGREEMENT” (emphasis added), the fifteen silent agreements are labeled

only “WEBCASTER PERFORMANCE LICENSE.” See, e.g., RIAA Exs. 60 DR-73

DR. Similarly, while the Yahoo! agreement and others grant an express ephemeral

license (see, e.g., RIAA Ex. 75 at §2.1.2), the fifteen silent agreements lack this

provision. What all 26 do have in common, however, is an express provision which

states that xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxx See, e.g., RIAA Ex. 75 DR at §2.2.3). Thus, both types of agreements

are clear, internally consistent, and unambiguous on their face. The ones labeled as

granting ephemeral licenses do so expressly, while the ones labeled simply as

performance licenses are limited to that right. Because these fifteen do not provide any

ephemeral royalty rate, they provide the Panel no guidance on what the ephemeral royalty

rate should be.

However, because they do constitute a significant portion of the marketplace

evidence, the Panel sought to analyze how they came about. Four different reasons could

explain the unexpected state of affairs. First, at least some of the licensees may have

believed that their agreements included ephemeral rights. For example, Mr. Heilbronn of

Lomasoft, although he did not negotiate the agreement himself, was not a lawyer, and did

not head his company at the time, testified to his understanding that his xxx royalty rate

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Tr. 13106-07 (Heilbronn). The Panel believes

that he was mistaken.
103

A second possible explanation is that these services could have been sufficiently

small to enable them to operate using only the single free statutory ephemeral copy. Tr.

9769-80 (Marks); Tr. 14970 (Garrett). While some evidence indicates that some of these

were smaller, single-channel, or never-launched webcasters, the record does not establish

any specificity and suggests, at best, various contradictory inferences. Tr. 14974-88

(Garrett).

A third possible explanation is that ephemeral rates are generally so much smaller

than performance rates that they were treated almost as an afterthought, possibly on the

order of a sales tax, and accordingly were simply not addressed in some negotiations.

For example, the record reveals that in the Yahoo! case, after eleven months of extensive

negotiation, multiple term sheets, and near closure on many issues -- and six days before

Mr. Marks reported to the RIAA Negotiating Committee that “we have a deal” (RIAA

Ex. 137 DR at N14561 (6/29/00)) -- the ephemeral rate was still “to be agreed upon.” Id.

at N11828 (Term Sheet, 6/23/00). In the negotiation, in the last six days, an ephemeral

rate agreement was reached (id. at N14561), although it may not have been in other

negotiations.

A fourth possible explanation is that initially RIAA did not press the issue so long

as it received what it regarded as a “satisfactory” performance royalty rate. In each of the

first fifteen agreements, RIAA negotiated either 15% of revenue or about 0.4¢ per

performance. See RIAA Exs. 60 DR-73 DR. While negotiating the xxxxxxxxxxxxxxxxx

xxxxxxxxxx and Yahoo!), as it became clear that any agreement reached with Yahoo!

would be closer to one-half the previous amounts, lead negotiator Marks asked the

Negotiating Committee xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
104

xxxxxxxxxxxxxx RIAA Ex. 137 DR at N14548 (3/29/00). In the context of a non-

“satisfactory” rate, the Committee was clear that xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxx RIAA Ex. 137 DR at N14557 (xxxxxx, 3/31/00); and at

N14555 (xxxxxxx, 3/28/00). In virtually all the agreements thereafter, they did.

4. The Panel’s Ephemeral Royalty Determination

In setting an ephemeral royalty rate, the Panel thus has before it the following:

two agreements founded on a basis not now advocated by any party, fifteen agreements

which did not provide a rate, the largest single agreement at an effective rate of 8.8%, and

eight other agreements at a 10% rate (express or calculable). The Panel concludes that the

rate most representative of that negotiated in the marketplace between willing buyers and

willing sellers, as represented by these 26 agreements, lies within the range between 8.8%

and 10% of the performance royalty amount. For all of the reasons discussed in Section

V. G. above, the Panel places significant weight on the Yahoo! rate of 8.8% and does not

afford great weight to the other 25 agreements. Indeed, even at face value, as explained

here, they do not represent evidence which establishes RIAA’s proposed rate.

Accordingly granting very modest effect to the agreements which have ephemeral rates

around 10%, the Panel rounds the 8.8% Yahoo! rate up to 9%. It determines,

accordingly, that the §112(e) royalty rate for whatever number of ephemeral copies are

necessary for the sole purpose of facilitating performances under §114(f) shall be set at

9% of the amount of performance royalties paid by a licensee.
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O. OTHER ISSUES

1. Same Rates for Both License Periods

As previously noted, the purpose of this proceeding is to set rates and terms for

two time periods: (1) October 28, 1998 (the effective date of the DMCA) through

December 31, 2000; and (2) January 1, 2001 through December 31, 2002. See Order of

December 4, 2000 at 5. However, the rates and terms proposed by all parties are the

same for both periods.70 The Panel agrees that, based upon the record before us, there is

no warrant to set different rates, nor any inflation adjustments.

2. Long Song Surcharge

RIAA proposes a “long song surcharge” for all performances of songs over five

minutes in duration. See RIAA PFFCL ¶ 210. RIAA asserts that this “provision is in all

of the relevant RIAA license agreements with B2C webcasters.” Id. To the contrary, this

provision is xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Accordingly, we decline to impose this provision.

3. Partial Performances

Webcasters urge the Panel to exclude from payment partial performances of a

sound recording that do not reach a threshhold duration of thirty seconds. See

Webcasters’ Supplemental Submission of January 18, 2002 at ¶¶ 13-14. Webcasters note

 

70 Within the context of its rate proposal, Webcasters did propose a modest inflation adjustment.

See Services’ Proposed Rates and Terms (November 6, 2001) ¶¶ 2(a)(3) and 2(e). However, the

record does not support this adjustment. In any event, the Panel readily acknowledges that its rate

determinations are not so precisely calculated as to render an inflation adjustment meaningful or

necessary. In this regard, we felt quite comfortable rounding our rate determinations to the

nearest hundredth of a cent. This rounding likely subsumes any minor inflation adjustments.
106

that truncated performances can occur as a result of “technology glitches or user

activation of song-skip functions.” Id. at ¶ 15. This is true, however the record does not

support payment exemptions.

Recognizing the potential for technological glitches that cause occasional

streaming failures, three of the 26 RIAA agreements provide exemptions for

performances under 10 seconds in duration (two of the three apply only in the

introductory periods). See RIAA Exhibits xxxxx at § 1.6 xxxxxxxxxxxxxxxxxx at

§ 3.1.1 xxxxxxxxxxxxxxxx at §1.6 xxxxxx. Indeed, streaming failures are also

accommodated in the benchmark Yahoo! agreement which provides:

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxx

RIAA Exhibit 75 DR at § 3.2.1 (emphasis added).

However, the Panel has already partially accounted for this provision in our

calculation of the per-performance rates. In our calculations, we used the xxxxx blended

rate as an end point to determine the final IO and RR rates. The xxxxx blended rate

constitutes the precise per-performance rate negotiated by the parties for the first xxx

xxxxx performances. These xxxxxxxx performances included the “free” xxxxxxxxxxx

performances. Accordingly, this provision has been partially accounted for because it

was part of our calculations to find each mid-point, or arithmetic mean, that constitutes

the final IO and RR rates. And only a “partial” accounting is appropriate because RIAA
107

agreed to this accommodation in the initial period only – as it did in two of the other three

agreements that made accommodations for technological glitches.

Respecting Webcasters’ second argument, we find no justification for excluding

short performances merely because the listener elected to skip a sound recording. The

functionality of certain services that allow listeners to skip unwanted performances

provides a benefit to webcasters.71 Although the record does not support a higher

performance rate for services that provide this functionality, 72 neither does the record

support penalizing the copyright owners for this benefit to webcasters – a benefit that

allows webcasters to offer a more satisfying experience to their listeners. None of the 26

agreements provides an exemption for skipped songs and no exemption is warranted.

Finally, we find that tracking and reporting partial performances would not

significantly burden the services. See Tr. 13789 (Marks) (“Every webcaster that we’ve

done a deal with has agreed to do so [report actual performances], generally speaking,

and they do it in different ways.”). See also Tr. 11800, 11817 (Kessler) (currently

available software allows the generation of a performance report that “truly is the push of

a button”).

Accordingly, the Panel declines to exempt partial performances from payment

obligations established herein. See, however, Panel discussion below regarding

“incidental performances” and the definition of a “performance.”

 

71 See e.g., Tr. 7412 (Roy) (“... consumers really like this functionality. They like to be able to

skip songs they don’t like. That’s one of the things they don’t like about terrestrial radio. And

they tend to stay on the services longer....”)

72 See our Section V.J.2., supra.
108

4. Incidental Performances

Webcasters also argue that “incidental performances” should be exempted from

payment. See Webcasters’ Supplemental Submission of January 18, 2002 at ¶¶ 13, 17.

The Panel agrees. The benchmark Yahoo! agreement explicitly excludes xxxxxxxxxx

xxxxxxxxxxxx from xxxxxxxxxxxxxxxxxxxx See RIAA Exhibit 75 DR at §§ 1.3, 1.10.

We accordingly adopt this provision which excludes transmissions or retransmissions that

make no more than incidental use of sound recordings, including but not limited to,

certain performances of brief musical transitions, brief performances during news, talk

and sports programming, commercial jingles, and certain background music. See id.

5. Performances of Sound Recordings Already Licensed

All parties agree that performances of sound recordings by webcasters that have

already secured a license for that performance should be exempt from payment under the

statutory licenses. See Webcasters’ Supplemental Submission of January 18, 2002 at ¶

19; RIAA’s Comments of January 18, 2002 at 8-9. The Panel agrees.

6. Definition of a Performance

Consistent with the Panel’s determinations above, and the applicable provisions

of the Yahoo! agreement, we define a “performance” as:

Each instance in which any portion of a sound recording is publicly

performed to a listener via a Web Site transmission or retransmission (e.g.

the delivery of any portion of a single track from a compact disc to one

listener) but excluding the following:

(1) A performance of a sound recording that does not require a license (e.g.,

the sound recording is not copyrighted);

(2) A performance of a sound recording for which the service has

previously obtained a license from the copyright owner of such sound

recording; and
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(3) An incidental performance that both (i) 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 (ii) 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).

See RIAA Exhibit 75 DR at §§ 1.3, 1.10; Webcasters’ Supplemental Submission of

January 18, 2002 at ¶ 19; RIAA’s Comments of January 18, 2002 at 8-9.

7. Calculating Number of Performances

As previously explained, the per-performance fee metric is preferred because,

among other reasons, it provides a fee structure directly tied to the intensity of sound

recording usage. See Section V.B., supra. However, as RIAA apparently concedes (cf.

RIAA PFFCL, Appendix C at ¶ 4), some services may not currently possess the proper

software, or technical expertise, to track or calculate accurately their performances of

sound recordings. Accordingly, as RIAA proposes (see id), statutory licensees should be

permitted to make a reasonable estimate of the number of their performances until such

time as they can reasonably be expected to acquire the software and expertise.73

 

73 RIAA proposes to permit estimation of performances prior to January 1, 2000 only. See RIAA

PFFCL, Appendix C at ¶ 4. However, we view this deadline (which precedes by almost five

months the expected date of the Librarian’s decision in this matter) as inequitable and

unworkable. The Panel believes services should be accorded more reasonable notice to acquire

the requisite software and technical expertise to begin accurately tracking performances. And

although the record does not support any particular timeframe, we view 30 days as reasonable. Cf.

Recording Industry of America v. Library of Congress, 176 F.3d 528, 536 (1999) (there are

“some circumstances in which the Librarian’s Decision must, for want of concrete data, be based

principally on sound judgment ... [so long as the matter in dispute has been] properly raised

before the arbitration panel so that the parties have a fair opportunity to address it, and so that the

Librarian has the benefit of the parties’ views before reaching a judgment”). In the instant

proceeding, the matter was raised during the hearing, and again in the RIAA PFFCL. The

Services have had ample opportunity to respond.
110

Accordingly, the Panel accepts RIAA’s proposal and permits estimation of the total

number of performances by a service as follows:

For the period up to the effective date of the rates and terms

prescribed herein, and for 30 days thereafter, the statutory licensee may

estimate its total number of performances if the actual number is not

available. Such estimation shall be based on multiplying the licensee’s total

number of Aggregate Tuning Hours by 15 performances per hour (1

performance per hour in the case of retransmissions of AM and FM radio

stations reasonably classified as news, business, talk or sports stations, and

12 performances per hour in the case of all other AM and FM radio

stations).

8. Discount for Promotion and Security

In response to inquiries from the Panel during the hearing, RIAA proposes that a

performance rate discount of 25% be allowed to any service that includes certain

promotional and security features not otherwise required by Sections 114 and 112. See

RIAA PFFCL ¶¶ 240-43. These include a “buy button” or other link to retail web sites

that offer sales of CDs, certain promotional announcements, listener surveys, and

limitations on the streaming technology used. See id. Some of these considerations are

consistent with those offered in many of the RIAA licensees. See RIAA Exhibits 60 DR

through 84 DR.

The Panel would encourage RIAA and webcasters relying upon the statutory

licenses to consider voluntary agreements that would effectuate such discounts. In the

final analysis, however, the Panel concludes that it should not mandate these discounts

because they entail matters beyond the statutory license and, arguably, beyond the

Panel’s authority. Moreover, the Panel is aware of no record evidence to support any

particular discount rate.
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VI. ROYALTY RATES FOR BUSINESS ESTABLISHMENT SERVICES

A. NATURE OF THE SERVICE

In addition to webcasters and broadcasters, the record before us shows that certain

organizations offer an entirely different type of music service, namely, the compilation

and delivery of background and foreground music to be played in business establishments

for the listening enjoyment of customers of those establishments. Pursuant to the

“Business Establishment Exemption” found in 17 U.S.C. § 114(d)(1)(C)(iv),

organizations which make digital transmissions in the course of such services are exempt

from any performance royalty so long as they comply with the requirements of the

DMCA. However, pursuant to § 17 U.S.C. § 112(e), those organizations are required to

pay a royalty for the right to make multiple ephemeral copies in the operation of such

services. RIAA’s petition to set the royalty rate for such ephemeral copies has been

assigned to this CARP panel for determination.

Unlike webcasting, Business Establishment (also called “background”) music

service is a form of business which has been in operation for decades. AEI Music

Network, Inc. (“AEI”) began distributing original artist recordings for use in business

establishments in 1971. See Knittel W.D.T. 4. Other companies, including DMX Music,

Inc. (“DMX”), Muzak, Inc. (“Muzak”), PlayNetwork, Inc., and Radio Programming and

Management, Inc., have also offered background music services to business

establishments for years. See, e.g., RIAA Exhibits xxxxxxxxxxxxxxxxxxxxxxxxxxx.

More recently, Music Choice and musicmusicmusic have sought to offer these services,

(see RIAA Exhibit 60-A DR; Tr. 14,746), and other entities have expressed interest in

entering the business as well. Tr. 2259 (Pipitone). In response to the Librarian’s

invitation, three companies--AEI, DMX, and Music Choice--filed notices of intent to
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participate in this CARP proceeding. Music Choice subsequently withdrew its notice, but

AEI and DMX both filed direct cases in April 2001. In May 2001, these latter companies

merged to become DMX/AEI Music (“DMX/AEI”), and that merged entity has continued

as an active party in the proceedings.

Again unlike webcasting, the Business Establishment music business has large

numbers of paying customers and substantial revenues. DMX/AEI provides music to

about xxxxxxx businesses and generates revenues of over xxxxxxxxx per year from this

service. See Knittel W.D.T. 4; Tr. 8492 (Knittel). As one would expect from a

successful business such as this, there have been technological advances over time in the

way in which such companies deliver their product.

Originally, AEI and DMX prepared musical programs on tapes and CDs to be

played “on-premises” in specialized equipment at their clients’ establishments. Later,

this on-premise service was improved. AEI and DMX provided their customers with a

proprietary hard disk based device which could play music programs that were placed on

an internal hard drive. See Knittel W.D.T. 8-9. In 1999, DMX and AEI established

“digital repositories” of numerous sound recordings, which could be utilized in all the

different models of their services. Tr. 8409, 8413, 8416-17 (Knittel); Talley W.D.T. 3-4.

DMX/AEI and RIAA agree that the “on-premises” services are not subject to the

§ 112(e) license at issue. Thus, the rates set in this proceeding do not apply to those

services. Instead, DMX, AEI, and other background music services have obtained from

copyright owners voluntary licensing agreements to utilize sound recordings in the

operation of those services.
113

Most recently, certain of the background music organizations have developed a

so-called “broadcast model” of their service.74 The model employed by DMX/AEI is

described in detail in the written and oral testimony of Barry Knittel and Douglas Talley

of DMX/AEI. In essence, the model involves digital transmission of musical programs to

customers over cable and/or satellite facilities. In the course of operating this service,

literally millions of ephemeral recordings are made at various stages of the process,

including composing the digital repository, programming, quality control, “client

computers,” and transmissions. Tr. 8632-8639, 8658-59 (Talley). In particular, “cache”

ephemerals are made when content is temporarily stored on a client server for

transmission to a cable affiliate or satellite. Id. And “buffer” ephemerals, which are

ubiquitous in the use of digital technology, are made at numerous stages throughout the

operation of the service. Id.

The parties agree that it is only this “broadcast” model of background music service

which is encompassed in the present proceeding and for which this Panel must set a

royalty rate. See Tr. 9567 (Berz); 9576, 9581-82 (Garrett).

 

74 For example, Muzak, the nation’s largest background music service with annual revenues of

approximately $87 million, operates a broadcast model of its service. In re Determination of

Statutory License Terms and Rates for Certain Digital Subscription Transmissions of Sound

Recordings, No. 96-5 CARP DSTRA (Library of Congress November 12, 1997), Report of the

Copyright Arbitration Royalty Panel ¶¶ 68-69. Musicmusicmusic is also licensed to operate a

broadcast service. See RIAA Exhibit 60-A DR.
114

B. RATE PROPOSALS OF THE PARTIES

1. DMX/AEI’s Rate Proposal

DMX/AEI proposes that the Panel set a royalty of $10,000 per year per

company for the making of buffer and cache copies to facilitate the digital transmission

of sound recordings in broadcast services, prorated for the period between October 28,

1998 and December 31, 1998. See DMX/AEI PFFCL ¶44.

While recognizing that, “as a theoretical matter the potential scope of ephemeral

recording rights available to the background music industry may be broader,” DMX/AEI

asserts that the Panel should set a royalty only for the use of cache and buffer ephemerals,

since its existing voluntary licenses allegedly give it the right to use its digital repository

in operation of the broadcast service, as well as the on-premises services. DMX/AEI

PFFCL ¶ 10.

DMX/AEI argues that the Panel would be entirely justified in setting this royalty

rate at zero. See DMX/AEI PFFCL ¶¶ 42-44. It contends that, in exempting DMCAcompliant background music services from any performance royalty, Congress concluded

that operation of such services would likely have a positive effect on the revenue of

copyright owners, and envisioned only a modest ephemeral royalty if there were evidence

of any significant “leakage” (ephemeral copies being used to generate records for sale),

which there is not. DMX/AEI PFFCL ¶¶ 46-50. It points out that the Copyright Office

has criticized the §112(e) statutory license as an “aberration” which should be repealed in

favor of an ephemeral recording exemption which would exempt buffer copies from any

royalty obligation. DMX/AEI PFFCL ¶¶ 51-53. Finally, DMX/AEI argues that, because

they have no “independent economic value” other than facilitating performances, its
115

ephemeral copies should have a royalty, at most, which is consistent with those set in

RIAA license agreements for webcasters. Its fee proposal of $10,000 per company (i.e.,

$20,000 for the merged DMX/AEI) is allegedly quite compatible with the Yahoo!

agreement, which sets a royalty of $50,000 per year for a much broader range of

ephemeral rights than DMX/AEI will require. See DMX/AEI PFFCL ¶¶ 54-56.

2. RIAA’s Rate Proposal

RIAA proposes that the Section 112(e) ephemeral license for broadcast

background music service be set at 10% of the gross revenue from such service, with a

minimum fee of $50,000 per year. See RIAA PFFCL ¶ 627. RIAA denies that

DMX/AEI’s existing licenses permit use of its non-DMCA-compliant digital repository

in the broadcast service. Thus, asserts RIAA, DMX/AEI will likely be required to utilize

in this service a DMCA-complaint database, which will entail creation of ephemeral

recordings beyond the cache and buffer copies for which DMX/AEI wants the Panel to

set a royalty. See RIAA Reply to DMX/AEI PFFCL ¶¶ 8 - 12.

 Moreover, RIAA argues, even if DMX/AEI were to prevail in its contention that its

presently licensed database can also be utilized in its broadcast service, the Panel should

not tailor the royalty to the individual circumstances of one company. Rather, it should

establish a blanket royalty which would permit any applicant, including those which may

not have seperately licensed databases, to utilize ephemeral recordings throughout the

operation of their service, regardless of the particular technology they choose to employ.

Id.

Further, RIAA contends, Congress was certainly aware that, notwithstanding the

absence of a performance royalty, background music companies have for years paid
116

substantial royalties to make the sound recording reproductions necessary to operate their

on-premises services, and there is no reason to believe that Congress intended to disturb

this “traditional stream of revenue” by creation of the § 112(e) license. Id.

RIAA notes that the Copyright Office’s comment about the aberrational nature of

the ephemeral license was made in connection with webcasting, not background music,

and, in any event, Congress has not accepted the Copyright Office’s view on this matter.

Id. at 11-12.

 Finally, RIAA asserts that the appropriate benchmarks for a royalty for the

background services are not recent licensee agreements from the very different world of

webcasting, but rather agreements which have been utilized for years to license sound

recording use by background services. Id. at 13-20.

C. WHAT IS THE ROYALTY FOR?

 A threshold dispute that the Panel needs to resolve in order to set a royalty in this

area is the question of what we are setting a royalty for. As noted above, DMX/AEI

argues that we should only set the royalty for the use of cache and buffer copies because,

it asserts, its existing licenses already give it the right to use its non-DMCA complaint

database in the broadcast service. RIAA disputes that the existing licenses give

DMX/AEI this right and argues that we should set the royalty for all ephemeral

recordings utilized in a broadcast service, which will likely involve -- at least for some

applicants - - ephemerals in DMCA-complaint databases, as well as cache and buffer

ephemerals. Resolution of this threshhold matter is complicated by the fact that the

dispute about the reach of DMX/AEI’s existing licenses is a matter for determination by

the courts, not this Panel, and no court has yet addressed the issue.
117

On reflection, we have concluded that the exact reach of DMX/AEI’s existing

licenses is irrelevant to our task. The background music license agreements introduced

into evidence show that royalty rates have not been based on xxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Thus, for

example, Knittel Rebuttal Exhibit 22, xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxx. Moreover, the royalty rates in DMX and AEI licenses were

essentially the same before and after November 1999, when they introduced the new

“digital repository” database.75

Some background music services may choose to operate broadcast services with

DMCA-compliant databases, as musicmusicmusic has done. See RIAA Exhibit 60-A ¶

2.1(c)(i). Others may conclude that a permanent, non-DMCA-complaint database

involves substantial cost savings and thus elect to obtain voluntary licenses for that

database. Still others may wish to operate without a database at all, as DMX and AEI did

before 1999. See Tr. 14,789. Choices about which technology to use involve cost-andbenefit tradeoffs about which neither side presented detailed evidence.

However that choice is made, though, no broadcast service can operate without

making millions of ephemeral recordings at many different stages of the process. Thus,

after Mr. Talley of DMX explained that he uses the term “ephemeral copies” to include

“cache and buffer copies” and nothing more, Tr. 8656, he was asked at what stages

ephemeral copies are made in the DMX/AEI broadcast model. He answered, “Every

 

75 Compare pre-1999 and post-1999 royalty rates in the respective license agreements and

renewals provided as RIAA Exs. 09 DR, 10 DR, 11 DR, 12 DR, and 13 DR.
118

stage from the transmission to the reception. There are many, many, many places where

this happens, where ephemeral copies are made.” Id.

Over the next ten pages of transcript, Mr. Talley described the “many places” in

the broadcast model at which ephemeral copies are made, including, but far from limited

to, the digital repository, Tr. 8656-66, after which this colloquy occurred:

Q: Okay. I guess as you said in your broadcast model there are a lot

 of different ephemeral copies that are made, correct?

A: Yes.

Q: And if you can’t make those ephemeral copies, you can’t use this

 broadcast model, can you?

A: That’s correct.

Tr. 8667

This testimony effectively refutes, in our view, DMX/AEI’s contention that its

ephemeral copies have “little or no independent economic value.” DMX/AEI Reply to

RIAA PFFCL ¶ 6. Without such ephemerals, no broadcast service could be operated, and

no revenue could be generated.

We agree with RIAA that, in creating the § 112(e) statutory license, with rates for

each type of service “binding on all copyright owners ... and transmitting organizations,”

17 U.S.C. § 112(e)(4), Congress intended to create blanket licenses which would afford

each licensee all the rights necessary to operate such a service, in this case, the right to

make any and all ephemeral copies utilized in a broadcast background music service. We

do not believe it appropriate to subdivide this package of rights into multiple minilicenses for the making of different kinds of ephemeral copies at numerous different

stages of the process. Nor does the evidence of the parties permit us to assign separate
119

value and separate royalties to each such sub-license, as DMX/AEI counsel have

acknowledged. See Tr. 14,762 (Rich).

Accordingly, the Panel concludes that the royalty we must set is for all ephemeral

copies which may be utilized in the operation of a broadcast service, and the royalty rate

is not dependent on whether or not a particular licensee’s model includes a DMCAcomplaint database.

D. DETERMINING THE ROYALTY RATE

1. The Views of Congress and the Copyright Office

We do not find persuasive DMX/AEI’s argument that Congress envisioned the

§112(e) royalty as a de minimis payment to guard only against the risk of leakage.

Nothing in the statute says so, nor does the legislative history compel that conclusion.

Rather, Congress plainly made fair market rate the talisman for this CARP, and we must

assume that Congress knew that for years copyright owners have been collecting millions

of dollars in royalties from background music companies for use of their sound

recordings in those services.76

Nor do we think the Copyright Office report cited by DMX/AEI mandates that we

set a zero or de minimis royalty. DMX/AEI PFFCL ¶ 51. First, the section of the report

quoted by DMX/AEI deals with webcasting, not background music. Second, while the

views of the Copyright Office on any matter are entitled to great respect, as stated

previously, Congress has yet to accept the Office’s view on this point. We are bound to

apply the Copyright Law as presently enacted.

 

76 Mr. Knittel testified that xxxxxxxx pays over xxxxxxxxx per year in royalties and fees to

copyright owners. Knittel W.D.T. 14.
120

2. The Statutory Factors

As we explained in Section III above, we believe the statutory command for

setting rates under § 112(e) is essentially the same as for setting rates under § 114(f)(2),

i.e., the determinative question is what price a willing buyer and willing seller would

agree to in the marketplace for the license in question. While the economic, competitive,

and programming factors described in the statute are relevant, and we have considered

them, the net effect of such factors is best gauged by looking at the prices actually

negotiated by willing buyers and willing sellers, if such agreements are available.

Thus, with respect to § 112(e)(4)(A), we agree with DMX/AEI that use of sound

recordings in background music services has significant promotional value. DMX/AEI

PFFCL ¶¶ 32-35. This is true whether the music is delivered via the on-premise model or

a broadcast service. This factor has led some small labels and individual artists on

occasion to license the use of their sound recordings for little of no royalty payment in

hopes of achieving wider public familiarity with their works. See Tr. 8380 (Knittel).

However, notwithstanding the promotional potential, the major record labels, which hold

the vast majority of sound recording copyrights, have insisted on significant royalty

payments in exchange for use of their complete repertories, and background music

companies have agreed to those payments, as discussed below.

Indeed, background music companies would have little economic incentive to

incur the capital costs of establishing a new, broadcast service unless they had concluded

that such a service would be more profitable than their existing, successful on-premises

services. Given that conclusion, such companies would naturally seek to move as many

customers as possible from on-premises to broadcast contracts. In fact, most DMX
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customers now receive their music through the broadcast service. Talley W.D.T. 3. If

the royalty rate for broadcast service is substantially lower than for on-premises service,

as DMX/AEI propose, then the shift in customers (and thus revenue) from on-premises to

broadcast service will substantially reduce the copyright owners’ “traditional stream of

revenue” from broadcast music companies, a factor which Congress instructed us, via

Section 112(e)(4)(A), to consider in setting the royalty rate.

Similarly, as regards §112(e)(4)(B), background music companies plainly have

played a major role with respect to the creative and technology contributions, capital

investment, cost, and risk relative to their services (see, e.g. evidence cited at DMX/AEI

PFFCL ¶¶ 36-41), and copyright owners have played a major role with respect to such

factors relative to the copyrighted works. (See, e.g., evidence cited at RIAA PFFCL ¶ ¶

488-89, 493-97.) The weight to be given by willing buyers and willing sellers to such

respective factors is, again, best demonstrated by the agreements they have actually

reached.

3. Agreements From Which Marketplace?

DMX/AEI contends that, if we are to derive a royalty from marketplace

agreements, we should look to the ephemeral royalty rates reflected in RIAA’s

agreements with certain webcasting licensees, particularly Yahoo!. However, in the

webcasting market, the principal royalty is plainly the § 114(f) performance royalty; the

ephemeral royalty is an ancillary royalty which produces only a modest increase in the

licensee’s overall royalty obligation. With respect to background music companies

which are exempt from the § 114(f) royalty obligation, § 112(e) is the only royalty which

licensees must pay in order to make use of all sound recordings in the operation of a

digital broadcast service.

Moreover, webcasting is an entirely different kind of business than background

music. It has different customers, different economics, and different delivery methods.
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Webcasting, as noted above, is a new business which has yet to prove profitable on a

large scale, whereas the background music business is well established and generates

very substantial revenues.

Thus, we believe the appropriate license agreements to use as benchmarks are

those by which copyright owners have for years granted background music companies

the right to use all of their sound recordings in the operation of their on-premises service.

We reject DMX/AEI’s contention that these agreements are irrelevant because they

involve the licensing of reproduction and distribution rights, rather than the right to make

ephemeral copies. It is apparent to us that these licensing agreements (introduced by both

RIAA and DMX/AEI) were effectively intended to permit the licensees to utilize sound

recordings in operating the background music services in question. The Section 112(e)

license here will have the same effect for broadcast services that make digital

transmissions of sound recordings.

4. Royalties Evidenced By the Pertinent Agreements

The parties have introduced nearly three dozen license agreements between

copyright owners and background music services. No party has contended, nor

introduced evidence to show, that these are anything other than what they appear to be,

namely, agreements between willing buyers and willing sellers, and we treat them as

such. The critical question is what royalties do these agreements establish?

Barry Knittel, formerly President of AEI Music Markets – Worldwide and now

DMX/AEI’s Senior Vice President of Business Affairs Worldwide, testified that AEI has
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approximately xxxx license agreements for North America, which fall into various

categories. See Tr. 8379-80 (Knittel).

First are licensing agreements which are “strictly promotional” and in which the

licensees do not expect a royalty. See Tr. 8380 (Knittel). These agreements are usually

with individuals who are trying to get their songs played. See Tr. 8390 (Knittel). AEI

has “very few” of these agreements. Id.

Second are agreements in which AEI pays a royalty of xx every time a sound

recording is used within one of its programs. See Tr. 8380.

Third are “marketing fund license agreements” in which the licensors “share in

our profits from music programming and receive certain distributions of royalties from

that and other promotional benefits.” Tr. 8380. Under such an agreement, the label

receives part of the royalty in cash and the balance is placed in an account to be used by

AEI for promotion of the label’s products in whatever way the label directs. Id. at 8384-

85. AEI has such agreements with xxxxxxxxxxxxxxxxxxxxxx Id.

Fourth are agreements in which xxxxxxxxxxxxxxxx receive a percentage of

AEI’s proceeds in cash rather than have those funds retained by AEI in a promotional

account. See Tr. 8468-69.

The Panel finds that the third and fourth form of agreement (whose principal

difference is whether the royalty is received entirely in cash or partly in the form of

promotional services requested by the licensor) comprise the predominant royalty

arrangement between AEI and the major labels who license the vast majority of

copyrighted sound recordings. See also Wilcox W.D.T. 12; Pipitone W.D.T. 3; Tr. 2266

(Pipitone). Similar agreements exist between major labels and other background music
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services, including xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, Muzak (xxxxx

xxxxxxxxxxxxxxxxxxxxx), Play Network Inc. (xxxxxxxxxxxxxxxxxxxxxxxxxxxxx), and

Radio Programming and Management, Inc. (xxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

It is true, as DMX/AEI asserts, that these agreements convey to the licensees

some benefits beyond the use of the sound recordings. But they also convey to the

licensor benefits beyond the royalty payment. It is clear, however, that “by far the most

important rights” conveyed to licensees by these agreements are the rights to copy and

distribute (i.e., to use) sound recordings in their background music service (Tr. 8475-76

(Knittel)), and it is thus reasonable to infer that the royalty obligation in these agreements

was assumed in exchange for those “far most important” rights.

The royalty obligation in these agreements is generally xxxxxx of gross proceeds

derived by the background music company from the licensed service. See, RIAA

Exhibits 9 DR, 10 DR, 11 DR, 12 DR, 13 DR, 14 DR, 26 DR, 27 DR, 28 DR, 60-A DR,

66 DR-X, Knittel Rebuttal Ex. 22; Knittel W.D.T. 14-15. Two agreements (RIAA

Exhibits xxxxxxxxxxxxxx) set the percentage for satellite service at xxx and for onpremises service at xxx; these agreements were negotiated at a time when it was

uncertain whether satellite service was subject to a royalty obligation. See Pipitone

W.D.T. 3-4; Tr. 2268-70 (Pipitone); Marks W.D.T. 31. One of these agreements (RIAA

Exhibit 14 DR) has subsequently expired, and the rate for on-premises service has gone

back to xxx. (RIAA Exhibit 10 DR). Other subsequent agreements (RIAA Exhibit 60-A

DR, Knittel Rebuttal Exhibit 22) have set a uniform percentage rate for satellite and onpremises services.
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In a few agreements (e.g., xxxxxxxxxxxxxxxxxxxKnittel Rebuttal Exhibit 22),

there are certain deductions from “gross proceeds” before the royalty percentage is

applied. In most of these agreements in evidence (RIAA Exs. xxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx), however, there are no deductions from gross

proceeds, and in some (e.g., RIAA Exs. xxxxxxxxxxxxxx), the licensee is obligated to

pay xxxxx per recording used in a program, in addition to the stated percentage of gross

proceeds.

From the evidence before us, the Panel finds that, among major labels and a

variety of background music companies, willing buyers and willing sellers have generally

agreed to blanket licenses to use sound recordings in such services in exchange for

royalty payments of approximately xxxxx of the gross proceeds of such services. As

discussed in Section VI.C. above, there is no evidence that the royalty rate depends on

what technology is used to deliver the music. Royalty rates for on-premises services

were 10-15% of gross proceeds before 1999, when DMX and AEI did not utilize digital

repositories, and 10-15% of gross proceeds after 1999, when they did. See note 75 supra.

Nor is there any persuasive evidence that willing buyers and willing sellers place a

significantly different value on a broadcast service which uses a DMCA-compliant

database from one which does not. See, e.g., RIAA Exhibit 60-A DR (xxxx royalty for

broadcast service with DMCA-compliant database) and Knittel Rebuttal Exhibit 22

(royalty of xxxxxxxxxxxxxxxxxxxxxxxxxxx, for broadcast service without DMCAcompliant database).77

 

77 The xxxxxxxxxxx per program feature is impossible to convert directly into a percent of

revenue, but plainly means that the total royalty obligation is greater than xxx of gross proceeds.
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In view of this evidence, the Panel concludes that, in exchange for a blanket

license to utilize all copyright owners’ sound recordings in a broadcast service under

Section 112(e), background music companies and copyright owners would agree to a

royalty of at least 10% of gross proceeds. RIAA has proposed that royalty, which lies at

the low end of the xxxxxxx range described above, partly to give some consideration to

the contention of DMX/AEI that its existing voluntary licenses already provide some of

the rights (i.e., the digital repository) it needs to operate such a service. Tr. 14658

(Garrett).

One subsidiary question which must be answered in setting such a rate is how to

define “gross proceeds.” RIAA has proposed an expansive definition drawn from the

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx). We reject this proposal for two

reasons. First, we believe that this licensee, xxxxxxxxxxx, was particularly motivated to

accommodate RIAA. Second, the definition in question is found in only one of the other

background music license agreements before us. In contrast, xxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxx agreements before us (RIAA DR Exhibits xxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxx) provides, in substantially uniform language, a simpler and less

sweeping definition of gross proceeds.78 This definition, which appears in more of the

 

78

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

(i) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

(ii) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxx
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agreements before us than does any other, has apparently been utilized by xxxxxx with

most of the background music services (AEI, DMX, Muzak, Play Network, Inc. and

Radio Programming and Management, Inc.) over a number of years. Thus the record

shows that this simple definition has won broad marketplace acceptance. While not

detailed, its widespread use suggests that the parties have developed workable

understandings for applying it in actual practice. We adopt this definition, as rephrased

to fit the Section 112(e) license.79

Secton 112(e) requires that the Panel also set a minimum fee for this kind of

service. However, the evidence before us is too varied to draw the conclusion that

willing buyers and willing sellers consistently agree to minimum fees on the order of

$50,000 per year, as requested by RIAA. While several of the agreements (RIAA

Exhibits xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx) have minimums of that

size or larger, one has a much smaller minimum (xxxxxxxxxxxxxxxxxxxxxxxxx) and

several (RIAA Exs. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx) have no

minimum payment at all. We conclude that the minimum fee of $500, which we have set

to cover the administrative costs of dealing with the webcasting and broadcasting

licensees, should apply to the Business Establishment licensees as well.

Accordingly, the Panel determines as follows:

 

79 Because any one label can only demand royalty payments from the background services for use

of its own recordings, a formula must be developed to calculate what portion of total proceeds

resulted from use of that label’s records. The definition we adopt does so differently for classical

recordings and other titles, presumably because the playing time of classical recordings varies

widely, whereas that of most other recordings is relatively uniform in length. For the blanket

license under 17 U.S.C. § 112 (e), there is no need to distinguish the copyrighted recordings of

one label from that of another, but there is a need to distinguish the portion of the background

company’s programs which utilize copyrighted recordings from the portions which utilize noncopyrighted recordings. The definition we select is easily adapted to that purpose.
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1. The Section 112(e) royalty rate for the making of unlimited numbers of

ephemeral recordings by background music organizations in the operation of broadcast

services pursuant to the Business Establishment exemption contained in 17 U.S.C. § 114

(d)(1)(C)(iv) shall be a sum equal to ten percent (10%) of the licensee’s gross proceeds

derived from the use of the musical programs which are attributable to copyrighted

recordings. The attribution of gross proceeds to copyrighted recordings shall be made on

the basis of:

(i) for classical programs, the proportion that the playing time of

copyrighted classical titles bears to the total playing time of

classical titles; or

(ii) for all other programs, the proportion that the number of

copyrighted titles bears to the total number of titles.

2. The minimum fee for each licensee shall be $500 per year.

VII. TERMS FOR SECTION 114(f) AND 112(e) LICENSES

 A. THE GOVERNING STANDARD

17 U.S.C. § § 114(f) and 112(e) require that, in addition to determining royalty

rates for the statutory licenses created by those sections, the Panel is also required to

establish terms for such licenses. Section 114(f) explicitly provides that the Panel’s

determination of such terms is governed by the same standard which controls its rate

determinations, i.e.,
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In establishing rates and terms for transmissions by eligible nonsubscription services and new subscription services, the copyright

arbitration royalty panel shall establish rates and terms that most clearly

represent the rates and terms that would have been negotiated in the

marketplace between a willing buyer and willing seller.

17 U.S.C. § 114(f)(2)(B) (emphasis added).

While the language of Section 112(e) is less explicit in defining the standard

applicable to the Panel’s determination of terms under that section, the Librarian has

previously ruled that “the standard for setting royalty fees for the Section 112 license is

identical to the standard used to set rates for the section 114 license” (Order of July 16,

2001 at 5), and there is no reason to conclude that this identity of standards would not

apply to the setting of Section 112 terms as well.

Thus, it is evident that the Panel is bound to adopt those terms which the record

shows would have been agreed to by willing buyers and willing sellers in the

marketplace. The question of whether such terms represent the optimum alternative from

the standpoint of administrative convenience and workability is not part of the governing

standard for the Panel, nor is it a matter on which we have either record evidence or

institutional expertise. Accordingly, while the Panel would not readily adopt terms which

are obviously unworkable, and has not done so here, we must defer to the expertise of the

Librarian the final evaluation of the administrative feasibility of terms which willing

buyers and willing sellers would agree to in marketplace negotiations.
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B. THE RECORD CONCERNING WILLING BUYER/

 WILLING SELLER AGREEMENT

During the suspension of proceedings described in Section II.D. supra, the parties

reached a contingent settlement concerning commercial broadcaster rates and an

agreement concerning virtually all terms for webcasters, broadcasters and background

music services. While the parties agreed that their rate settlement could not be presented

to the Panel until certain conditions were met, there was no such restriction concerning

the agreement on terms. Accordingly, on December 20, 2001, the Panel issued an order

granting the joint motion of the parties to reopen the record for the purpose of receiving

the agreed terms.

Subsequently, complications developed which prevented the Panel from receiving

the parties’ settlement concerning broadcaster rates. However, the parties continued to

maintain general agreement regarding nearly all terms. In a hearing on January 11, 2002,

the Panel solicited clarification and supporting authority for certain of the proposed

terms.

On February 1, 2002, the Services and the Copyright Owners and Performers filed

separate submissions tendering their respective proposals concerning terms. In each case,

the actual terms proposed were virtually identical in all respects except for two matters

addressed below. In each submission, the proposed term was followed by one or more

explanatory comments. Again, in the vast majority of instances, the comments from each

side were substantially identical.

The Panel has concluded that the nearly identical February 1, 2002 submissions of

the parties, which reflect extensive negotiations between all the parties to this case --

including RIAA, AFIM, AFTRA, AFM, DMX/AEI, NRBMLC, five large broadcaster
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groups, and a dozen webcasting services -- meet the standard of clearly representing the

terms that would have been negotiated in the marketplace between a willing buyer and a

willing seller. Extensive evidence in support of many of the terms was provided in the

written and oral testimony of a number of witnesses, including Barrie Kessler, Executive

Director of Internal Operations and Data Management for SoundExchange; Michael

Williams, RIAA’s Executive Vice President of Finance and Operations; Steven Marks,

RIAA’s Senior Vice President for Business and Legal Affairs; and Ronald Gertz,

President and CEO of Music Reports, Inc. Moreover, we do not see any provisions in

these terms which are plainly unworkable, although, as noted, we defer to the Librarian’s

greater expertise on this matter.80 Accordingly, the Panel adopts those terms which

reflect agreement among the parties.81

B. DISPUTED TERMS

The are two respects in which the parties did not reach agreement concerning

terms. The Panel must therefore determine how willing buyers and willing sellers would

have resolved those matters in their marketplace negotiations.

 

80 There are some provisions in the terms which cannot be fully settled until the Librarian makes

his final determination with respect to the royalty rates at issue and also issues a final order under

17 U.S.C. §§ 114(f)(4)(A) and 112(e)(7)(A) establishing applicable notice and record-keeping

requirements for the services involved in this proceeding. Those instances are noted in the

Panel’s determination of terms set forth in Appendix B hereto.

81 One term on which all parties agreed was the provision in Paragraph 3(f) that requires

Designated Agents to pay directly to performers their share of royalties. All parties seem to

recognize, and the Panel concurs, that this is the most efficient, economical, and reliable way to

assure that performers receive the royalties to which they are entitled under the statute. The

Copyright Office has raised the question of whether, regardless of its desirability, the statute

permits such direct payments. The memorandum submitted by AFM and AFTRA makes a strong

argument that it does. In the absence of contrary authority, we accept the AFM/AFTRA position

and commend it to the Copyright Office for favorable consideration.
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1. Definitions of Certain Terms

The Services ask that the Panel include in the terms we adopt the definitions,

contained in the parties’ joint submission of December 20, 2001, of four terms:

“Affiliated,” “AM/FM Streaming,” “Broadcaster,” “Non-Public.” Copyright Owners and

Performers oppose the adoption of such definitions, noting that they were developed to

explain the broadcaster rates settlement which has not been effectuated.

The Panel has concluded that these disputed definitions plainly relate to a broad

settlement of broadcaster issues which went well beyond this Panel’s jurisdiction, for

example, by extending beyond 2002. Because that settlement could not be realized, and

has never been presented to the Panel, we do not know the rate structure to which the

definitions in question relate. Based on the evidence of record, the Panel has determined

to adopt rates as set forth above, which are not tied to the particular definitions the

Services ask us to adopt. Accordingly, there is no need to include such definitions in the

terms we establish.

However, the Panel has concluded that, in view of the rate structure it has

determined to adopt, it should also adopt definitions of some terms that were not included

in the parties’ February 1, 2002 submissions. Accordingly, on February 6, 2002, the

Panel solicited the parties’ definitions of certain additional terms, has carefully

considered the parties responses` to this order, and has adopted what it deems the most

appropriate definitions for those additional terms.

2. Agent for Copyright Owners Who Do Not Designate an Agent

The terms agreed to by all the parties permit copyright owners to designate either
133

SoundExchange or Royalty Logic Inc. (RLI) as their Designated Agent for the

distribution of royalties to the copyright owners who designate them, and the performers

entitled to receive royalties from the performance of recordings owned by such copyright

owners. The parties, however, are in disagreement concerning who should be the agent

for copyright owners who fail to designate an agent, and the performers entitled to

receive royalties from the performance of such copyright owners’ recordings. The

Services propose RLI. Copyright Owners and performers propose SoundExchange.

While there are respectable arguments for either designation, the Panel has

concluded that willing buyers and willing sellers would ultimately have agreed upon

SoundExchange as the distribution agent for copyright owners who fail to designate one.

While the Services would like to see some competition among designated agents, they do

not have a vital stake in the matter. Once licensees have paid to the Receiving Agent

(whom the Services have agreed should be SoundExchange) the royalties and fees for

which they are liable, the distribution of such funds is not a matter in which they have a

direct interest.

Copyright owners and performers, on the other hand, have a direct and vital

interest in who distributes royalties to them and how that entity operates. AFM and

AFTRA, in particular, have expressed a strong preference for SoundExchange because of

its non-profit status, its experience with royalty payment, and a recent purported

reorganization of SoundExchange which allegedly gives artists substantial control over

its operations. Submission of AFM and AFSTRA Regarding Proposed Terms and

Eligible Non-Subscription Transmissions And The Making of Ephemeral Reproductions

at 15-18.
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The Panel believes that, in any marketplace negotiation between willing buyers

(i.e., licensees) and willing sellers (i.e., licensors) concerning the process for distributing

licensor payments, the licensees, having no direct stake in that aspect, would ultimately

have to accede to the strong preference of licensors concerning who should distribute

royalties to copyright owners who have not designated a particular agent. Accordingly,

we reflect such an agreement, or concession, in the terms we adopt here. The Panel also

believes that, as a matter of public policy, when choosing between a for-profit and a notfor-profit entity to serve parties who have not indicated a preference for either one, it is

generally more appropriate to select the not-for-profit organization, rather than one whose

distributions would be reduced by some degree of profit margin in addition to the

administrative cost of collecting and distributing such royalties.

C. THE FORMAT OF APPENDIX B

Set forth in Appendix B hereto are the terms which the Panel has adopted for the

Section 114 and 112 statutory licenses in question. The terms themselves appear in

regular type. Explanatory comments appear after each term in italics. Comments

preceded by a bullet (•) were submitted by all parties. Comments preceded by an asterisk

(*) were either written by the Panel or adopted by the Panel from the submission of one

side or the other.
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VIII. DETERMINATION AND ASSESSMENT OF COSTS

In accordance with the findings and conclusions set forth above, the Panel determines

that the compulsory license rates and terms for the digital audio transmission of sound

recordings by eligible nonsubscription services pursuant to 17 U.S.C. § 114(f) and the

making of ephemeral recordings by transmitting organizations pursuant to 17 U.S.C. §

112(e) for the period October 28, 1998 through December 31, 2002 should be as set forth

in Appendix B hereto.

Pursuant to 37 CFR § 251.54(a)(1) and (b), the costs of the arbitrators shall be

borne by the parties hereto in accordance with their agreement, namely, one-half by the

Copyright Owners and Performers and one-half by the Services.

IX. CERTIFICATION BY THE CHAIRPERSON

Pursuant to 37 CFR § 251.53(b), on this 20th day of February, 2002, the Panel

Chairperson hereby certifies the Panel’s determinations contained herein.

DATED: FEBRUARY 20, 2002

________________________

Eric E. Van Loon

Chairperson

________________________

Jeffrey S. Gulin

Arbitrator

_______________________

Curtis E. von Kann

Arbitrator