```

[Federal Register Volume 77, Number 96 (Thursday, May 17, 2012)]
[Proposed Rules]
[Pages 29259-29270]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11751]

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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 385

[Docket No. 2011-3 CRB Phonorecords II]

Adjustment of Determination of Compulsory License Rates for 
Mechanical and Digital Phonorecords

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Proposed rule.

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SUMMARY: The Copyright Royalty Judges are publishing for comment 
proposed regulations that set the rates and terms for the section 115 
statutory license for the use of musical works in physical phonorecord 
deliveries, permanent digital downloads, ringtones, interactive 
streaming, limited downloads, limited offerings, mixed service bundles, 
music bundles, paid locker services and purchased content locker 
services.

DATES: Comments and objections, if any, are due no later than June 18, 
2012.

ADDRESSES: Comments and objections may be sent electronically to 
crb@loc.gov. In the alternative, send an original, five copies, and an 
electronic copy on a CD either by mail or hand delivery. Please do not 
use multiple means for transmission. Comments and objections may not be 
delivered by an overnight delivery service other than the U.S. Postal 
Service Express Mail. If by mail (including overnight delivery), 
comments and objections must be addressed to: Copyright Royalty Board, 
P.O. Box 70977, Washington, DC 20024-0977. If hand delivered by a 
private party, comments and objections must be brought between 8:30 
a.m. and 5 p.m. to the Copyright Office Public Information Office, 
Library of Congress, James Madison Memorial Building, Room LM-401, 101 
Independence Avenue SE., Washington, DC 20559-6000. If delivered by a 
commercial courier,

[[Page 29260]]

comments and objections must be delivered between 8:30 a.m. and 4 p.m. 
to the Congressional Courier Acceptance Site located at 2nd and D 
Street NE., Washington, DC, and the envelope must be addressed to: 
Copyright Royalty Board, Library of Congress, James Madison Memorial 
Building, LM-403, 101 Independence Avenue SE., Washington, DC 20559-
6000.

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

SUPPLEMENTARY INFORMATION: Section 115 of the Copyright Act, title 17 
of the United States Code, also known as the mechanical compulsory 
license, requires a copyright owner of a nondramatic musical work to 
grant a license to any person who wants to make and distribute 
phonorecords of that work, provided that the copyright owner has 
allowed phonorecords of the work to be produced and distributed, and 
that the licensee complies with the statute and regulations.
    On November 1, 1995, Congress passed the Digital Performance Right 
in Sound Recordings Act of 1995 (``DPRSRA''), Public Law 104-39, 109 
Stat. 336, which extended the mechanical license to digital phonorecord 
deliveries. 17 U.S.C. 115(c)(3). Consequently, the license now covers 
digital transmissions of phonorecords in addition to the physical 
copies such as compact discs, vinyl and cassette tapes. Chapter 8 of 
the Copyright Act requires the Copyright Royalty Judges (``Judges'') to 
conduct proceedings every five years to determine the rates and terms 
for the section 115 license.\1\ 17 U.S.C. 801(b)(1), 804(b)(4). In 
accordance with section 804(b)(4), the Judges commenced a proceeding to 
set rates and terms for the section 115 license on January 9, 2006, 71 
FR 1454, and their final determination of said rates and terms was 
published in the Federal Register on January 26, 2009. 74 FR 4510. 
Therefore, the next proceeding to determine rates and terms for the 
section 115 license was to be commenced in January 2011. 17 U.S.C. 
804(b)(4).
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    \1\ The Copyright Royalty Judges, which were established by the 
Copyright Royalty and Distribution Reform Act of 2004, are the third 
entity to set the rates and terms for the section 115 license. Until 
its abolishment in 1993, the Copyright Royalty Tribunal (``CRT'') 
had the authority to adjust the statutory rates for the section 115 
license. After 1993, Congress granted authority to Copyright 
Arbitration Royalty Panels (``CARP''), under the supervision of the 
Librarian of Congress, to set rates and, unlike the CRT, to also 
adopt terms for the mechanical license. See Copyright Royalty 
Tribunal Reform Act of 1993, Public Law 103-198, 107 Stat. 2304.
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    Accordingly, the Judges published a notice commencing the current 
proceeding and requesting interested parties to submit their petitions 
to participate. 76 FR 590 (January 5, 2011). Petitions to Participate 
were received from: Microsoft Corporation (``Microsoft''); Omnifone 
Group Limited (``Omnifone''); CTIA--The Wireless Association 
(``CTIA''); Cricket Communications, Inc. (``Cricket''); PacketVideo, 
Inc. (``PacketVideo''); Slacker, Inc. (``Slacker''); Google, Inc. 
(``Google''); Amazon Digital Services, Inc. (``Amazon''); Beyond 
Oblivion, Inc. (``Beyond Oblivion''); AT&T Mobility LLC (``AT&T 
Mobility''); Rdio, Inc. (``Rdio''); Apple, Inc. (``Apple''); the 
Recording Industry Association of America, Inc. (``RIAA''); Rhapsody 
International, Inc. (``Rhapsody''); RealNetworks, Inc. 
(``RealNetworks''); Thumbplay, Inc. (``Thumbplay''); \2\ Pandora Media, 
Inc. (``Pandora''); The American Association of Independent Music 
(``A2IM''); Music Reports, Inc. (``Music Reports''); the National Music 
Publishers' Association, Inc., Songwriters Guild of America, Nashville 
Songwriters Association International and Church Music Publishers 
Association, jointly (collectively, ``Copyright Owners''); EMI Music 
Publishing (``EMI''); the Songwriters Guild of America (``SGA''); 
Napster, LLC (``Napster''); the Digital Media Association (``DiMA''); 
and Broadcast Music, Inc. (``BMI'').\3\ The Judges set the timetable 
for the three-month negotiation period, see 17 U.S.C. 803(b)(3), and 
directed the participants to submit their written direct statements no 
later than April 30, 2012. On April 11, 2012, the Judges received a 
Motion to Adopt Settlement stating that ``[a]ll participants in the 
Proceeding are parties to the Settlement or have reviewed the 
Settlement and do not object to its being adopted as the basis for 
setting statutory rates and terms.'' \4\ Motion to Adopt Settlement at 
2 (April 11, 2012).
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    \2\ Thumbplay withdrew from the proceeding on April 5, 2012.
    \3\ BMI's filing was styled as ``Comments in Response to Request 
for Petitions to Participate,'' and BMI withdrew its comments on 
December 1, 2011.
    \4\ Music Reports' signature was inadvertently omitted from the 
motion; its signature was provided on April 18, 2012. Since neither 
Beyond Oblivion nor Napster were signatories to the motion, the 
Judges presume that they each reviewed the settlement and do not 
object to its adoption, per the signatories' representation.
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    Section 801(b)(7)(A) of the Copyright Act authorizes the Judges to 
adopt rates and terms negotiated by ``some or all of the participants 
in a proceeding at any time during the proceeding'' provided they are 
submitted to the Judges for approval. This section provides that in 
such event:

    (i) The Copyright Royalty Judges shall provide to those that 
would be bound by the terms, rates, or other determination set by 
any agreement in a proceeding to determine royalty rates an 
opportunity to comment on the agreement and shall provide to 
participants in the proceeding under section 803(b)(2) that would be 
bound by the terms, rates, or other determination set by the 
agreement an opportunity to comment on the agreement and object to 
its adoption as a basis for statutory terms and rates; and
    (ii) The Copyright Royalty Judges may decline to adopt the 
agreement as a basis for statutory terms and rates for participants 
that are not parties to the agreement, if any participant described 
in clause (i) objects to the agreement and the Copyright Royalty 
Judges conclude, based on the record before them if one exists, that 
the agreement does not provide a reasonable basis for setting 
statutory terms or rates.

17 U.S.C. 801(b)(7)(A). Rates and terms adopted pursuant to this 
provision are binding on all copyright owners of musical works and 
those using such musical works in the activities set forth in the 
proposed regulations.
    In publishing the parties' proposed rates and terms, the Judges are 
removing two provisions and seeking comment on two others. The parties 
have included language in proposed Sec. Sec.  385.10(c) and 385.20(c) 
that states that ``[n]either this subpart nor the act of obtaining a 
license under 17 U.S.C. 115 * * * and shall not constitute evidence, as 
to the circumstances in which any of the exclusive rights of a 
copyright owner are implicated or a license, including a compulsory 
license pursuant to 17 U.S.C. 115, must be obtained.'' Our task, as set 
forth in section 115 and chapter 8 of the Copyright Act, is to adopt 
rates and terms for the compulsory license for the making and 
distributing of physical and digital phonorecords. It is not our task 
to offer evaluations, limitations or characterizations of the rates and 
terms. Therefore, the Judges decline to include the language ``and 
shall not constitute evidence'' in our regulations. See Mechanical and 
Digital Phonorecord Delivery Rate Determination Proceeding, Notice of 
proposed rulemaking, Docket No. 2006-3 CRB DPRA, 73 FR 57033, 57034 
(October 1, 2008); Noncommercial Educational Broadcasting Statutory 
License, Notice of proposed rulemaking, Docket No. 2006-2 CRB NCBRA, 72 
FR 19138, 19139 (April 17, 2007).
    The parties have proposed two provisions, Sec.  385.12(e) and Sec.  
385.22(d), relating to statements of account for the

[[Page 29261]]

section 115 license. Both of these sections, which are virtually 
identical, appear to propose in their second sentences requirements 
beyond those set forth by the Register of Copyrights in 37 CFR 201.19. 
The authority to prescribe regulations relating to statements of 
account is ``the exclusive domain of the Register,'' see Division of 
Authority Between the Copyright Royalty Judges and the Register of 
Copyrights under the Section 115 Statutory License, Final order, Docket 
No. RF 2008-1, 73 FR 48396, 48398 (August 19, 2008), and the Judges 
``cannot alter requirements issued by the Register regarding statements 
of account.'' Review of Copyright Royalty Judges Determination, Notice; 
correction, Docket No. 2009-1, 74 FR 4537, 4543 (January 26, 2009).\5\ 
Consequently, we particularly invite comments of the parties, and the 
Register of Copyrights, regarding these provisions.
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    \5\ In the prior section 115 proceeding, the Register found the 
Judges' adoption of language that excluded inclusion of certain 
activities from the statements of account to be erroneous. See 74 FR 
at 4543. Consequently, the Judges exercised their continuing 
jurisdiction and deleted the offending language. See Mechanical and 
Digital Phonorecord Delivery Rate Determination Proceeding, Final 
rule, Docket No. 2006-3 CRB DPRA, 74 FR 6832 (February 11, 2009).
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    As noted above, the public may comment and object to any or all of 
the proposed regulations contained in this notice. Such comments and 
objections must be submitted no later than June 18, 2012.

List of Subjects in 37 CFR Part 385

    Copyright, Phonorecords, Recordings.

Proposed Regulations

    For the reasons set forth in the preamble, the Copyright Royalty 
Judges propose to amend Part 385 of Chapter III of title 37 of the Code 
of Federal Regulations to read as follows:

PART 385--RATES AND TERMS FOR USE OF MUSICAL WORKS UNDER COMPULSORY 
LICENSE FOR MAKING AND DISTRIBUTING OF PHYSICAL AND DIGITAL 
PHONORECORDS

    1. The authority citation for part 385 continues to read as 
follows:

    Authority: 17 U.S.C. 115, 801(b)(1), 804(b)(4).

Sec.  385.4  [Amended]

    2. Section 385.4 is amended by removing ``(`` and adding ``Sec.  '' 
in its place.
    3. Revise heading of Subpart B to read as follows:

Subpart B--Interactive Streaming and Limited Downloads

    4. Section 385.10 is amended as follows:
    a. By revising paragraph (b); and
    b. By adding a new paragraph (c).
    The revisions and additions read as follows:

Sec.  385.10  General.

* * * * *
    (b) Legal compliance. A licensee that, pursuant to 17 U.S.C. 115, 
makes or authorizes interactive streams or limited downloads of musical 
works through subscription or nonsubscription digital music services 
shall comply with the requirements of that section, the rates and terms 
of this subpart, and any other applicable regulations, with respect to 
such musical works and uses licensed pursuant to 17 U.S.C. 115.
    (c) Interpretation. This subpart is intended only to set rates and 
terms for situations in which the exclusive rights of a copyright owner 
are implicated and a compulsory license pursuant to 17 U.S.C. 115 is 
obtained. Neither this subpart nor the act of obtaining a license under 
17 U.S.C. 115 is intended to express or imply any conclusion as to the 
circumstances in which any of the exclusive rights of a copyright owner 
are implicated or a license, including a compulsory license pursuant to 
17 U.S.C. 115, must be obtained.
    5. Section 385.11 is amended as follows:
    a. By adding in alphabetical order definitions for ``Affiliate'', 
``Applicable consideration'', and ``GAAP'';
    b. In paragraph (2) of ``Limited download'', by adding ``provider'' 
after ``service'';
    c. In paragraph for definition of ``Offering'', by removing 
``service's'' and adding ``service provider's'' in its place, and by 
adding ``provider'' after ``service'';
    d. By removing paragraph for definition of ``Publication date'';
    e. In paragraph for definition of ``Relevant page'', by removing 
``users for limited downloads or interactive streams'' and adding 
``users for licensed activity'' in its place;
    f. In paragraph for definition of ``Service'', by adding 
``provider'' after ``Service'' in paragraph heading;
    g. In paragraph (1) of ``Service revenue'', by removing ``U.S. 
Generally Accepted Accounting Principles'' and adding ``GAAP'' in its 
place;
    h. In paragraphs (1)(i)-(ii) of ``Service revenue'', by adding 
``provider'' after ``service'';
    i. In paragraph (1)(iii) of ``Service revenue'', by adding 
``provider'' after ``by the service'';
    j. In paragraph (2)(i) of ``Service revenue'', by removing 
``service'' and adding ``service provider'' in its place each place it 
appears; and
    k. In paragraph (5) of ``Service revenue'', by removing ``In 
connection with such a bundle, if a record company providing sound 
recording rights to the service'' and by removing paragraphs (5)(i) and 
(ii).
    The additions read as follows:

Sec.  385.11  Definitions.

    Affiliate means an entity controlling, controlled by, or under 
common control with another entity, except that an affiliate of a 
record company shall not include a copyright owner of musical works to 
the extent it is engaging in business as to musical works.
    Applicable consideration means anything of value given for the 
identified rights to undertake the licensed activity, including, 
without limitation, ownership equity, monetary advances, barter or any 
other monetary and/or nonmonetary consideration, whether such 
consideration is conveyed via a single agreement, multiple agreements 
and/or agreements that do not themselves authorize the licensed 
activity but nevertheless provide consideration for the identified 
rights to undertake the licensed activity, and including any such value 
given to an affiliate of a record company for such rights to undertake 
the licensed activity. For the avoidance of doubt, value given to a 
copyright owner of musical works that is controlling, controlled by, or 
under common control with a record company for rights to undertake the 
licensed activity shall not be considered value given to the record 
company. Notwithstanding the foregoing, applicable consideration shall 
not include in-kind promotional consideration given to a record company 
(or affiliate thereof) that is used to promote the sale or paid use of 
sound recordings embodying musical works or the paid use of music 
services through which sound recordings embodying musical works are 
available where such in-kind promotional consideration is given in 
connection with a use that qualifies for licensing under 17 U.S.C. 115.
    GAAP means U.S. Generally Accepted Accounting Principles, except 
that if the U.S. Securities and Exchange Commission permits or requires 
entities with securities that are publicly traded in the U.S. to employ 
International Financial Reporting Standards, as issued by the 
International Accounting Standards Board, or as accepted by the 
Securities and Exchange Commission if different from that issued by the

[[Page 29262]]

International Accounting Standards Board, in lieu of Generally Accepted 
Accounting Principles, then an entity may employ International 
Financial Reporting Standards as ``GAAP'' for purposes of this subpart.
* * * * *
    6. Section 385.12 is amended as follows:
    a. In paragraph (b), by removing ``offering.'' and adding 
``offering taking into consideration service revenue and expenses 
associated with such offering.'' in its place;
    b. In paragraph (b)(1), by removing ``Service.'' and adding 
``Offering.'' in its place and by adding ``provider'' after 
``service'';
    c. In paragraph (b)(1)(i), by removing ``revenue as'' and adding 
``revenue associated with the relevant offering as'' in its place;
    d. In paragraph (b)(2), by removing ``service, subtract'' and 
adding ``service provider, subtract'' in its place, by removing ``by 
the service'', by removing ``While'' and adding ``Although'' in its 
place, by removing ``under its agreements with performing rights 
societies as defined in 17 U.S.C. 101'', and by removing ``In the 
latter case,'' and adding ``In the case where the service is also 
engaging in the public performance of musical works that does not 
constitute licensed activity,'' in its place;
    e. In paragraph (b)(3), by adding ``provider'' after ``service'';
    f. In paragraph (b)(4), by removing ``used by the service'' and 
adding ``used by the service provider'' in its place each place it 
appears, by removing ``on or after October 1, 2010'', by removing ``if 
the service is'' and adding ``if the service provider is'';
    g. By revising paragraph (c);
    h. In paragraph (d), by removing ``For licensed activity on or 
after October 1, 2010,''; and
    i. By adding a new paragraph (f).
    The revisions and additions read as follows:

Sec.  385.12  Calculation of royalty payments in general.

* * * * *
    (c) Percentage of service revenue. The percentage of service 
revenue applicable under paragraph (b) of this section is 10.5%.
* * * * *
    (f) Confidentiality. A licensee's statement of account, including 
any and all information provided by a licensee with respect to the 
computation of a subminimum, shall be maintained in confidence by any 
copyright owner, authorized representative or agent that receives it, 
and shall solely be used by the copyright owner, authorized 
representative or agent for purposes of reviewing the amounts paid by 
the licensee and verifying the accuracy of any such payments, and only 
those employees of the copyright owner, authorized representative or 
agent who need to have access to such information for such purposes 
will be given access to such information; provided that in no event 
shall access be granted to any individual who, on behalf of a record 
company, is directly involved in negotiating or approving royalty rates 
in transactions authorizing third party services to undertake licensed 
activity with respect to sound recordings. A licensee's statements of 
account, including any and all information provided by a licensee with 
respect to the computation of a subminimum, shall not be used for any 
other purpose, and shall not be disclosed to or used by or for any 
record company affiliate or any third party, including any third-party 
record company.
    7. Section 385.13 is amended as follows:
    a. In paragraphs (a)(1)-(a)(5), by removing ``Sec.  385.12(b)(1)'' 
and adding ``Sec.  385.12(b)(1)(ii)'' in its place each place it 
appears, and by removing ``Sec.  385.12(b)(3)'' and adding ``Sec.  
385.12(b)(3)(ii)'' in its place each place it appears;
    b. In paragraph (a)(4), by adding ``providing licensed activity 
that is'' before ``made available to end users'' and by adding 
``(including products or services subject to other subparts)'' before 
``as part of a single transaction'';
    c. By revising paragraphs (b) and (c);
    d. By redesignating paragraph (d) as paragraph (e);
    e. By adding a new paragraph (d); and
    f. In newly redesignated paragraph (e), by removing ``the service 
shall for the relevant offering calculate its'' and adding ``the'' in 
its place, and by adding ``shall be calculated,'' before ``taking into 
account''.
    The revisions and additions read as follows:

Sec.  385.13  Minimum royalty rates and subscriber-based royalty floors 
for specific types of services.

* * * * *
    (b) Computation of subminimum I. For purposes of paragraphs (a)(2), 
(3), and (4) of this section, subminimum I for an accounting period 
means the aggregate of the following with respect to all sound 
recordings of musical works used in the relevant offering of the 
service provider during the accounting period--
    (1) In cases in which the record company is the licensee under 17 
U.S.C. 115 and the record company has granted the rights to make 
interactive streams or limited downloads of a sound recording through 
the third-party service together with the right to reproduce and 
distribute the musical work embodied therein, 17.36% of the total 
amount expensed by the service provider or any of its affiliates in 
accordance with GAAP for such rights for the accounting period, which 
amount shall equal the applicable consideration for such rights at the 
time such applicable consideration is properly recognized as an expense 
under GAAP.
    (2) In cases in which the record company is not the licensee under 
17 U.S.C. 115 and the record company has granted the rights to make 
interactive streams or limited downloads of a sound recording through 
the third-party service without the right to reproduce and distribute 
the musical work embodied therein, 21% of the total amount expensed by 
the service provider or any of its affiliates in accordance with GAAP 
for such rights for the accounting period, which amount shall equal the 
applicable consideration for such rights at the time such applicable 
consideration is properly recognized as an expense under GAAP.
    (c) Computation of subminimum II. For purposes of paragraphs (a)(1) 
and (5) of this section, subminimum II for an accounting period means 
the aggregate of the following with respect to all sound recordings of 
musical works used in the relevant offering of the service provider 
during the accounting period--
    (1) In cases in which the record company is the licensee under 17 
U.S.C. 115 and the record company has granted the rights to make 
interactive streams and limited downloads of a sound recording through 
the third-party service together with the right to reproduce and 
distribute the musical work embodied therein, 18% of the total amount 
expensed by the service provider or any of its affiliates in accordance 
with GAAP for such rights for the accounting period, which amount shall 
equal the applicable consideration for such rights at the time such 
applicable consideration is properly recognized as an expense under 
GAAP.
    (2) In cases in which the record company is not the licensee under 
17 U.S.C. 115 and the record company has granted the rights to make 
interactive streams or limited downloads of a sound recording through 
the third-party service without the right to reproduce and distribute 
the musical work embodied therein, 22% of the total amount expensed by 
the service

[[Page 29263]]

provider or any of its affiliates in accordance with GAAP for such 
rights for the accounting period, which amount shall equal the 
applicable consideration for such rights at the time such applicable 
consideration is properly recognized as an expense under GAAP.
    (d) Payments by third parties. If a record company providing sound 
recording rights to the service provider for a licensed activity--
    (1) Recognizes revenue (in accordance with GAAP, and including for 
the avoidance of doubt all applicable consideration with respect to 
such rights for the accounting period, regardless of the form or timing 
of payment) from a person or entity other than the service provider 
providing the licensed activity and its affiliates, and
    (2) Such revenue is received, in the context of the transactions 
involved, as applicable consideration for such rights,
    (3) Then such revenue shall be added to the amounts expensed by the 
service provider solely for purposes of paragraphs (b)(1), (b)(2), 
(c)(1), or (c)(2) of this section, as applicable, if not already 
included in such expensed amounts. Where the service provider is the 
licensee, if the service provider provides the record company all 
information necessary for the record company to determine whether 
additional royalties are payable by the service provider hereunder as a 
result of revenue recognized from a person or entity other than the 
service provider as described in the immediately preceding sentence, 
then the record company shall provide such further information as 
necessary for the service provider to calculate the additional 
royalties and indemnify the service provider for such additional 
royalties. The sole obligation of the record company shall be to pay 
the licensee such additional royalties if actually payable as royalties 
hereunder; provided, however, that this shall not affect any otherwise 
existing right or remedy of the copyright owner nor diminish the 
licensee's obligations to the copyright owner.
* * * * *
    8. Section 385.14 is amended as follows:
    a. In paragraphs (a)(1)(iii)(A)-(C), by removing ``service'' and 
adding ``service provider'' in its place each place it appears;
    b. In paragraph (a)(1)(iii)(A), by removing ``commencing on or 
after October 1, 2010, except'' and adding ``other than'' in its place;
    c. In paragraph (a)(3), by removing ``the service shall provide'' 
and adding ``the service provider shall provide'' in its place, by 
removing ``the service shall have'' and adding ``the service provider 
shall have'' in its place, and by removing ``the service (but'' and 
adding ``the service provider (but'' in its place;
    d. By revising paragraph (b)(1);
    e. In paragraph (b)(4), by removing ``the service, and not'' and 
adding ``the service provider, and not'' in its place; and
    f. By revising paragraph (d).
    The revisions read as follows:

Sec.  385.14  Promotional royalty rate.

* * * * *
    (b) * * *
    (1) No applicable consideration for making or authorizing the 
relevant interactive streams or limited downloads is received by the 
record company, any of its affiliates, or any other person or entity 
acting on behalf of or in lieu of the record company, except for in-
kind promotional consideration given to a record company (or affiliate 
thereof) that is used to promote the sale or paid use of sound 
recordings or the paid use of music services through which sound 
recordings are available;
* * * * *
    (d) Interactive streaming of clips. In addition to those in 
paragraph (a) of this section, the provisions of this paragraph (d) 
apply to interactive streaming conducted or authorized by record 
companies under the promotional royalty rate of segments of sound 
recordings of musical works with a playing time that does not exceed 90 
seconds. Such interactive streams may be made or authorized by a record 
company under the promotional royalty rate without any of the temporal 
limitations set forth in paragraphs (b) and (c) of this section (but 
subject to the other conditions of paragraphs (b) and (c) of this 
section, as applicable). For clarity, this paragraph (d) is strictly 
limited to the uses described herein and shall not be construed as 
permitting the creation or use of an excerpt of a musical work in 
violation of 17 U.S.C. 106(2) or 115(a)(2) or any other right of a 
musical work owner.
    9. Add Subpart C to read as follows:
Subpart C--Limited Offerings, Mixed Service Bundles, Music Bundles, 
Paid Locker Services and Purchased Content Locker Services
Sec.
385.20 General.
385.21 Definitions.
385.22 Calculation of royalty payments in general.
385.23 Royalty rates and subscriber-based royalty floors for 
specific types of services.
385.24 Free trial periods.
385.25 Reproduction and distribution rights covered.
325.26 Effect of rates.

Subpart C--Limited Offerings, Mixed Service Bundles, Music Bundles, 
Paid Locker Services and Purchased Content Locker Services

Sec.  385.20  General.

    (a) Scope. This subpart establishes rates and terms of royalty 
payments for certain reproductions or distributions of musical works 
through limited offerings, mixed service bundles, music bundles, paid 
locker services and purchased content locker services provided in 
accordance with the provisions of 17 U.S.C. 115. For the avoidance of 
doubt, to the extent that product configurations for which rates are 
specified in subpart A of this part are included within licensed 
subpart C of this part activity, the rates specified in subpart A of 
this part shall not apply, except that in the case of a music bundle 
the compulsory licensee may elect to pay royalties for the music bundle 
pursuant to subpart C of this part or for the components of the bundle 
pursuant to subpart A of this part.
    (b) Legal compliance. A licensee that, pursuant to 17 U.S.C. 115, 
makes or authorizes reproduction or distribution of musical works in 
limited offerings, mixed service bundles, music bundles, paid locker 
services or purchased content locker services shall comply with the 
requirements of that sections, the rates and terms of this subpart, and 
any other applicable regulations, with respect to such musical works 
and uses licensed pursuant to 17 U.S.C. 115.
    (c) Interpretation. This subpart is intended only to set rates and 
terms for situations in which the exclusive rights of a copyright owner 
are implicated and a compulsory license pursuant to 17 U.S.C. 115 is 
obtained. Neither this subpart nor the act of obtaining a license under 
17 U.S.C. 115 is intended to express or imply any conclusion as to the 
circumstances in which any of the exclusive rights of a copyright owner 
are implicated or a license, including a compulsory license pursuant to 
17 U.S.C. 115, must be obtained.

Sec.  385.21  Definitions.

    For purposes of this subpart, the following definitions shall 
apply:
    Affiliate shall have the meaning given in Sec.  385.11.
    Applicable consideration shall have the meaning given in Sec.  
385.11, except that for purposes of this subpart references in the 
definition of ``Applicable consideration'' in Sec.  385.11 to licensed 
activity shall mean licensed subpart C of this part activity.

[[Page 29264]]

    Free trial royalty rate means the statutory royalty rate of zero in 
the case of certain free trial periods, as provided in Sec.  385.24.
    GAAP shall have the meaning given in Sec.  385.11.
    Interactive stream shall have the meaning given in Sec.  385.11.
    Licensee shall have the meaning given in Sec.  385.11.
    Licensed subpart C of this part activity means--
    (1) In the case of a limited offering, the applicable interactive 
streams or limited downloads;
    (2) In the case of a locker service, the applicable interactive 
streams, permanent digital downloads, restricted downloads or 
ringtones;
    (3) In the case of a music bundle, the applicable reproduction or 
distribution of a physical phonorecord, permanent digital download or 
ringtone; and
    (4) In the case of a mixed service bundle, the applicable--
    (i) Permanent digital downloads;
    (ii) Ringtones;
    (iii) To the extent a limited offering is included in a mixed 
service bundle, interactive streams or limited downloads; or
    (iv) To the extent a locker service is included in a mixed service 
bundle, interactive streams, permanent digital downloads, restricted 
downloads or ringtones.
    Limited download shall have the meaning given in Sec.  385.11.
    Limited offering means a subscription service providing interactive 
streams or limited downloads where--
    (1) An end user is not provided the opportunity to listen to a 
particular sound recording chosen by the end user at a time chosen by 
the end user (i.e., the service does not provide interactive streams of 
individual recordings that are on-demand, and any limited downloads are 
rendered only as part of programs rather than as individual recordings 
that are on-demand); or
    (2) The particular sound recordings available to the end user over 
a period of time are substantially limited relative to services in the 
marketplace providing access to a comprehensive catalog of recordings 
(e.g., a service limited to a particular genre, or permitting 
interactive streaming only from a monthly playlist consisting of a 
limited set of recordings).
    Locker service means a service providing access to sound recordings 
of musical works in the form of interactive streams, permanent digital 
downloads, restricted downloads or ringtones, where the service has 
reasonably determined that phonorecords of the applicable sound 
recordings have been purchased by the end user or are otherwise in the 
possession of the end use prior to the end user's first request to 
access such sound recordings by means of the service. The term service 
locker does not extend to any part of a service otherwise meeting this 
definition as to which a license is not obtained for the applicable 
reproductions and distributions of musical works.
    Mixed service bundle means an offering of one or more of permanent 
digital downloads, ringtones, locker services or limited offerings, 
together with one or more of non-music services (e.g., Internet access 
service, mobile phone service) or non-music products (e.g., a device 
such as a phone) of more than token value, that is provided to users as 
part of one transaction without pricing for the music services or music 
products separate from the whole offering.
    Music bundle means an offering of two or more of physical 
phonorecords, permanent digital downloads or ringtones provided to 
users as part of one transaction (e.g., download plus ringtone, CD plus 
downloads). A music bundle must contain at least two different product 
configurations and cannot be combined with any other offering 
containing licensed activity under subpart B of this part or subpart C 
of this part.
    (1) In the case of music bundles containing one or more physical 
phonorecords, the physical phonorecord component of the music bundle 
must be sold under a single catalog number, and the musical works 
embodied in the digital phonorecord delivery configurations in the 
music bundle must be the same as, or a subset of, the musical works 
embodied in the physical phonorecords; provided that when the music 
bundle contains a set of digital phonorecord deliveries sold by the 
same record company under substantially the same title as the physical 
phonorecord (e.g., a corresponding digital album), up to 5 sound 
recordings of musical works that are included in the stand-alone 
version of such set of digital phonorecord deliveries but are not 
included on the physical phonorecord may be included among the digital 
phonorecord deliveries in the music bundle. In addition, the seller 
must permanently part with possession of the physical phonorecord or 
phonorecords sold as part of the music bundle.
    (2) In the case of music bundles composed solely of digital 
phonorecords deliveries, the number of digital phonorecord deliveries 
in either configuration cannot exceed 20, and the musical works 
embodied in each configuration in the music bundle must be the same as, 
or a subset of, the musical works embodied in the configuration 
containing the most musical works.
    Paid locker service means a locker service that is a subscription 
service.
    Permanent digital download shall have the meaning given in Sec.  
385.2.
    Purchased content locker service means a locker service made 
available to end-user purchasers of permanent digital downloads, 
ringtones or physical phonorecords at no incremental charge above the 
otherwise applicable purchase price of the permanent digital downloads, 
ringtones or physical phonorecords, with respect to the sound 
recordings embodied in permanent digital downloads or ringtones or 
physical phonorecords purchased from a qualifying seller as described 
in paragraph (1) of the definition of ``Purchased content locker 
service,'' whereby the locker service enables the purchaser to engage 
in one or both of the qualifying activities identified in paragraph (2) 
of the definition of ``Purchased content locker service.'' In addition, 
in the case of a locker service made available to end-user purchasers 
of physical phonorecords, the seller must permanently part with 
possession of the physical phonorecords.
    (1) A qualifying seller for purposes of this definition of 
``purchased content locker service'' is the same entity operating such 
locker service, one of its affiliates or predecessors, or--
    (i) In the case of permanent digital downloads or ringtones, a 
seller having another legitimate connection to the locker service 
provider set forth in one or more written agreements (including that 
the locker service and permanent digital downloads or ringtones are 
offered through the same third party); or
    (ii) In the case of physical phonorecords, a seller having an 
agreement with--
    (A) The locker service provider whereby such parties establish an 
integrated offer that creates a consumer experience commensurate with 
having the same service both sell the physical phonorecord and offer 
the locker service; or
    (B) A service provider that also has an agreement with the entity 
offering the locker service, where pursuant to those agreements the 
service provider has established an integrated offer that creates a 
consumer experience commensurate with having the same service both sell 
the physical phonorecord and offer the locker service.
    (2) Qualifying activity for purposes of this definition of 
``purchased content

[[Page 29265]]

locker service'' is enabling the purchaser to--
    (i) Receive one or more additional phonorecords of such purchased 
sound recordings of musical works in the form of permanent digital 
downloads or ringtones at the time of purchase, or
    (ii) Subsequently access such purchased sound recordings of musical 
works in the form of interactive streams, additional permanent digital 
downloads, restricted downloads or ringtones.
    Record company shall have the meaning given in Sec.  385.11.
    Restricted download means a digital phonorecord delivery 
distributed in the form of a download that may not be retained and 
played on a permanent basis. The term restricted download includes a 
limited download.
    Ringtone shall have the meaning given in Sec.  385.2.
    Service provider shall have the meaning given in Sec.  385.11, 
except that for purposes of this subpart references in the definition 
of ``Service provider'' in Sec.  385.11 to licensed activity and 
service revenue shall mean licensed subpart C of this part activity and 
subpart C of this part service revenue, respectively.
    Subpart C of this part offering means a service provider's offering 
of licensed subpart C of this part activity that is subject to a 
particular rate set forth in Sec.  385.23(a) (e.g., a particular 
subscription plan available through the service provider).
    Subpart C of this part relevant page means a page (including a Web 
page, screen or display) from which licensed subpart C of this part 
activity offered by a service provider is directly available to end 
users, but only where the offering of licensed subpart C of this part 
activity and content that directly relates to the offering of licensed 
subpart C of this part activity (e.g., an image of the artist or 
artwork closely associated with such offering, artist or album 
information, reviews of such offering, credits and music player 
controls) comprises 75% or more of the space on that page, excluding 
any space occupied by advertising. A licensed subpart C of this part 
activity is directly available to end users from a page if sound 
recordings of musical works can be accessed by end users for licensed 
subpart C of this part activity from such page (in most cases this will 
be the page where the transmission takes place).
    Subpart C of this part service revenue. (1) Subject to paragraphs 
(2) through (6) of the definition of ``Subpart C of this part service 
revenue,'' and subject to GAAP, subpart C of this part service revenue 
shall mean the following:
    (i) All revenue recognized by the service provider from end users 
from the provision of licensed subpart C of this part activity;
    (ii) All revenue recognized by the service provider by way of 
sponsorship and commissions as a result of the inclusion of third-party 
``in-stream'' or ``in-download'' advertising as part of licensed 
subpart C of this part activity (i.e., advertising placed immediately 
at the start, end or during the actual delivery, by way of 
transmissions of a musical work that constitute licensed subpart C of 
this part activity); and
    (iii) All revenue recognized by the service provider, including by 
way of sponsorship and commissions, as a result of the placement of 
third-party advertising on a subpart C of this part relevant page of 
the service or on any page that directly follows such subpart C of this 
part relevant page leading up to and including the transmission of a 
musical work that constitutes licensed subpart C of this part activity; 
provided that, in the case where more than one service is actually 
available to end users from a subpart C of this part relevant page, any 
advertising revenue shall be allocated between such services on the 
basis of the relative amounts of the page they occupy.
    (2) In each of the cases identified in paragraph (1) of the 
definition of ``Subpart C of this part service revenue,'' such revenue 
shall, for the avoidance of doubt,
    (i) Include any such revenue recognized by the service provider, or 
if not recognized by the service provider, by any associate, affiliate, 
agent or representative of such service provider in lieu of its being 
recognized by the service provider;
    (ii) Include the value of any barter or other nonmonetary 
consideration;
    (iii) Not be reduced by credit card commissions or similar payment 
process charges; and
    (iv) Except as expressly set forth in this subpart, not be subject 
to any other deduction or set-off other than refunds to end users for 
licensed subpart C of this part activity that they were unable to use 
due to technical faults in the licensed subpart C of this part activity 
or other bona fide refunds or credits issued to end users in the 
ordinary course of business.
    (3) In each of the cases identified in paragraph (1) of the 
definition of ``Subpart C of this part service revenue,'' such revenue 
shall, for the avoidance of doubt, exclude revenue derived solely in 
connection with services and activities other than licensed subpart C 
of this part activity, provided that advertising or sponsorship revenue 
shall be treated as provided in paragraphs (2) and (4) of the 
definition of ``Subpart C of this part service revenue.'' By way of 
example, the following kinds of revenue shall be excluded:
    (i) Revenue derived from non-music voice, content and text 
services;
    (ii) Revenue derived from other non-music products and services 
(including search services, sponsored searches and click-through 
commissions);
    (iii) Revenue generated from the sale of actual locker service 
storage space to the extent that such storage space is sold at a 
separate retail price;
    (iv) In the case of a locker service, revenue derived from the sale 
of permanent digital downloads or ringtones; and
    (v) Revenue derived from other music or music-related products and 
services that are not or do not include licensed subpart C of this part 
activity.
    (4) For purposes of paragraph (1) of the definition of ``Subpart C 
of this part service revenue,'' advertising or sponsorship revenue 
shall be reduced by the actual cost of obtaining such revenue, not to 
exceed 15%.
    (5) In the case of a mixed service bundle, the revenue deemed to be 
recognized from end users for the service for the purpose of the 
definition in paragraph (1) of the definition of ``Subpart C of this 
part service revenue'' shall be the greater of--
    (i) The revenue recognized from end users for the mixed service 
bundle less the standalone published price for end users for each of 
the non-music product or non-music service components of the bundle; 
provided that, if there is no such standalone published price for a 
non-music component of the bundle, then the average standalone 
published price for end users for the most closely comparable non-music 
product or non-music service in the U.S. shall be used or, if more than 
one such comparable exists, the average of such standalone prices for 
such comparables shall be used; and
    (ii) Either--
    (A) In the case of a mixed service bundle that either has 750,000 
subscribers or other registered users, or is reasonably expected to 
have 750,000 subscribers or other registered users within 1 year after 
commencement of the mixed service bundle, 40% of the standalone 
published price of the licensed music component of the bundle (i.e., 
the permanent digital downloads, ringtones, locker service or limited 
offering); provided that, if there is no such standalone published 
price for the licensed music component of the bundle, then the average 
standalone published price for end users for the

[[Page 29266]]

most closely comparable licensed music component in the U.S. shall be 
used or, if more than one such comparable exists, the average of such 
standalone prices for such comparables shall be used; and further 
provided that in any case in which royalties were paid based on this 
paragraph due to a reasonable expectation of reaching 750,000 
subscribers or other registered users within 1 year after commencement 
of the mixed service bundle and that does not actually happen, 
applicable payments shall, in the accounting period next following the 
end of such 1-year period, retroactively be adjusted as if paragraph 
(5)(ii)(B) of the definition of ``Subpart C of this part service 
revenue'' applied; or
    (B) Otherwise, 50% of the standalone published price of the 
licensed music component of the bundle (i.e., the permanent digital 
downloads, ringtones, locker service or limited offering); provided 
that, if there is no such standalone published price for the licensed 
music component of the bundle, then the average standalone published 
price for end users for the most closely comparable licensed music 
component in the U.S. shall be used or, if more than one such 
comparable exists, the average of such standalone prices for such 
comparables shall be used.
    (6) In the case of a music bundle containing a physical 
phonorecord, where the music bundle is distributed by a record company 
for resale and the record company is the compulsory licensee--
    (i) Service revenue shall be 150% of the record company's wholesale 
revenue from the music bundle; and
    (ii) The times at which distribution and revenue recognition are 
deemed to occur shall be in accordance with Sec.  201.19 of this title.
    Subscription service means a digital music service for which end 
users are required to pay a fee to access the service for defined 
subscription periods of 3 years or less (in contrast to, for example, a 
service where the basic charge to users is a payment per download or 
per play), whether such payment is made for access to the service on a 
standalone basis or as part of a bundle with one or more other products 
or services, and including any use of such a service on a trial basis 
without charge as described in Sec.  385.24.

Sec.  385.22  Calculation of royalty payments in general.

    (a) Applicable royalty. Licensees that make or authorize licensed 
subpart C of this part activity pursuant to 17 U.S.C. 115 shall pay 
royalties therefor that are calculated as provided in this section, 
subject to the royalty rates and subscriber-based royalty floors for 
specific types of services provided in Sec.  385.23, except as provided 
for certain free trial periods in Sec.  385.24.
    (b) Rate calculation methodology. Royalty payments for licensed 
subpart C of this part activity shall be calculated as provided in 
paragraph (b) of this section. If a service provides different subpart 
C of this part offerings, royalties must be separately calculated with 
respect to each such subpart C of this part offering taking into 
consideration service revenue and expenses associated with such 
offering. Uses subject to the free trial royalty rate shall be excluded 
from the calculation of royalties due, as further described in this 
section and the following Sec.  385.23.
    (1) Step 1: Calculate the All-In Royalty for the Subpart C of this 
Part Offering. For each accounting period, the all-in royalty for each 
subpart C of this part offering of the service provider is the greater 
of:
    (i) The applicable percentage of subpart C of this part service 
revenue associated with the relevant offering as set forth in Sec.  
385.23(a) (excluding any subpart C of this part service revenue derived 
solely from licensed subpart C of this part activity uses subject to 
the free trial royalty rate), and
    (ii) The minimum specified in Sec.  385.23(a) for the subpart C of 
this part offering involved.
    (2) Step 2: Subtract applicable performance royalties to determine 
the payable royalty pool, which is the amount payable for the 
reproduction and distribution of all musical works used by the service 
provider by virtue of its licensed subpart C of this part activity for 
a particular subpart C of this part offering during the accounting 
period. From the amount determined in step 1 in paragraph (b)(1) of 
this section, for each subpart C of this part offering of the service 
provider, subtract the total amount of royalties for public performance 
of musical works that has been or will be expensed pursuant to public 
performance licenses in connection with uses of musical works through 
such subpart C of this part offering during the accounting period that 
constitute licensed subpart C of this part activity (other than 
licensed subpart C of this part activity subject to the free trial 
royalty rate), or in connection with previewing of such subpart C of 
this part offering during the accounting period. Although this amount 
may be the total of the payments with respect to the service for that 
subpart C of this part offering for the accounting period, it will be 
less than the total of such public performance payments if the service 
is also engaging in public performance of musical works that does not 
constitute licensed subpart C of this part activity, or previewing of 
such licensed subpart C of this part activity. In the case where the 
service is also engaging in the public performance of musical works 
that does not constitute licensed subpart C of this part activity, the 
amount to be subtracted for public performance payments shall be the 
amount of such payments allocable to licensed subpart C of this part 
activity uses (other than free trial royalty rate uses), and previewing 
of such uses, in connection with the relevant subpart C of this part 
offering, as determined in relation to all uses of musical works for 
which the public performance payments are made for the accounting 
period. Such allocation shall be made on the basis of plays of musical 
works or, where per-play information is unavailable due to bona fide 
technical limitations as described in step 3 in paragraph (b)(3) of 
this section, using the same alternative methodology as provided in 
step 3 in paragraph (b)(3) of this section.
    (3) Step 3: Calculate the Per-Work Royalty Allocation for Each 
Relevant Work. This is the amount payable for the reproduction and 
distribution of each musical work used by the service provider by 
virtue of its licensed subpart C of this part activity through a 
particular subpart C of this part offering during the accounting 
period. To determine this amount, the result determined in step 2 in 
paragraph (b)(2) of this section must be allocated to each musical work 
used through the subpart C of this part offering. The allocation shall 
be accomplished as follows:
    (i) In the case of limited offerings (but not limited offerings 
that are part of mixed service bundles), by dividing the payable 
royalty pool determined in step 2 in paragraph (b)(2) of this section 
for such offering by the total number of plays of all musical works 
through such offering during the accounting period (other than free 
trial royalty rate plays) to yield a per-play allocation, and 
multiplying that result by the number of plays of each musical work 
(other than free trial royalty rate plays) through the offering during 
the accounting period. For purposes of determining the per-work royalty 
allocation in all calculations under this step 3 only (i.e., after the 
payable royalty pool has been determined), for sound recordings of 
musical works with a playing time of over 5 minutes, each play shall be 
counted as provided in paragraph (c) of this section. Notwithstanding 
the foregoing, if the service provider is not

[[Page 29267]]

capable of tracking play information due to bona fide limitations of 
the available technology for services of that nature or of devices 
usable with the service, the per-work royalty allocation may instead be 
accomplished in a manner consistent with the methodology used by the 
service provider for making royalty payment allocations for the use of 
individual sound recordings.
    (ii) In the case of mixed service bundles and locker services, by--
    (A) Determining a constructive number of plays of all licensed 
musical works that is the sum of the total number of interactive 
streams of all licensed musical works made through such offering during 
the accounting period (other than free trial royalty rate interactive 
streams), plus the total number of plays of restricted downloads of all 
licensed musical works made through such offering during the accounting 
period as to which the service provider tracks plays (other than free 
trial royalty rate restricted downloads), plus 5 times the total number 
of downloads of all licensed musical works made through such offering 
during the accounting period as to which the service provider does not 
track plays (other than free trial royalty rate downloads);
    (B) Determining a constructive per-play allocation that is the 
payable royalty pool determined in step 2 of paragraph (b)(2) of this 
section for such offering divided by the constructive number of plays 
of all licensed musical works determined in paragraph (b)(3)(ii)(A) of 
this section;
    (C) For each licensed musical work, determining a constructive 
number of plays of that musical work that is the sum of the total 
number of interactive streams of such licensed musical work made 
through such offering during the accounting period (other than free 
trial royalty rate interactive streams), plus the total number of plays 
of restricted downloads of such licensed musical work made through such 
offering during the accounting period as to which the service provider 
tracks plays (other than free trial royalty rate restricted downloads), 
plus 5 times the total number of downloads of such licensed musical 
work made through such offering during the accounting period as to 
which the service provider does not track plays (other than free trial 
royalty rate downloads); and
    (D) For each licensed musical work, determining the per-work 
royalty allocation by multiplying the constructive per-play allocation 
determined in paragraph (b)(3)(ii)(B) of this section by the 
constructive number of plays of that musical work determined in 
paragraph (b)(3)(ii)(C) of this section.
    (E) Notwithstanding the foregoing, if a service provider offers 
both a paid locker service and a purchased content locker service, and 
with respect to the purchased content locker service there is no 
subpart C of this part service revenue and the applicable subminimum is 
zero dollars, then the service provider shall be permitted to include 
within the calculation of constructive plays under paragraphs 
(b)(3)(ii)(A) and (b)(3)(ii)(C) of this section for the paid locker 
service, the licensed subpart C of this part activity made through the 
purchased content locker service (i.e., the total number of interactive 
streams of all licensed musical works made through the purchased 
content locker service during the accounting period (other than free 
trial royalty rate interactive streams), plus the total number of plays 
of restricted downloads of all licensed musical works made through the 
purchased content locker service during the accounting period as to 
which the service provider tracks plays (other than free trial royalty 
rate restricted downloads), plus 5 times the total number of downloads 
of all licensed musical works made through the purchased content locker 
service during the accounting period as to which the service provider 
does not track plays (other than free trial royalty rate downloads)); 
provided that the relevant licensed subpart C of this part activity 
made through the purchased content locker service is similarly included 
within the play calculation for the paid locker service for the 
corresponding sound recording rights.
    (iii) In the case of music bundles, by--
    (A) Allocating the payable royalty pool determined in step 2 of 
paragraph (b)(2) of this section to separate pools for each type of 
product configuration included in the music bundle (e.g., CD, permanent 
digital download, ringtone) in accordance with the ratios that the 
standalone published prices of the products that are included in the 
music bundle bear to each other; provided that, if there is no such 
standalone published price for such a product, then the average 
standalone published price for end users for the most closely 
comparable product in the U.S. shall be used or, if more than one such 
comparable exists, the average of such standalone prices for such 
comparables shall be used; and
    (B) Allocating the product configuration pools determined in 
paragraph (b)(3)(iii)(A) of this section to individual musical works by 
dividing each such pool by the total number of sound recordings of 
musical works included in products of that configuration in the music 
bundle.
    (c) Overtime adjustment. For purposes of the calculations in step 3 
of paragraph (b)(3)(i) of this section only, for sound recordings of 
musical works with a playing time of over 5 minutes, adjust the number 
of plays as follows:

(1) 5:01 to 6:00 minutes--Each play = 1.2 plays
(2) 6:01 to 7:00 minutes--Each play = 1.4 plays
(3) 7:01 to 8:00 minutes--Each play = 1.6 plays
(4) 8:01 to 9:00 minutes--Each play = 1.8 plays
(5) 9:01 to 10:00 minutes--Each play = 2.0 plays

    (6) For playing times of greater than 10 minutes, continue to add 
.2 plays for each additional minute or fraction thereof.
    (d) Accounting. The calculations required by paragraph (b) of this 
section shall be made in good faith and on the basis of the best 
knowledge, information and belief of the licensee at the time payment 
is due, and subject to the additional accounting and certification 
requirements of 17 U.S.C. 115(c)(5) and Sec.  201.19 of this title. 
Without limitation, a licensee's statements of account shall set forth 
each step of its calculations with sufficient information to allow the 
copyright owner to assess the accuracy and manner in which the licensee 
determined the payable royalty pool and per-work allocations (including 
information sufficient to demonstrate whether and how a minimum royalty 
payment pursuant to Sec.  385.23 does or does not apply) and, for each 
subpart C of this part offering reported, also indicate the type of 
licensed subpart C of this part activity involved and the number of 
plays or downloads, as applicable, of each musical work (including an 
indication of any overtime adjustment applied, if applicable) that is 
the basis of the per-work royalty allocation being paid.
    (e) Confidentiality. A licensee's statements of account, including 
any and all information provided a licensee with respect to the 
computation of a subminimum, shall be maintained in confidence of any 
copyright owner, authorized representative or agent that receives it, 
and shall solely be used by the copyright owner, authorized 
representative or agent for purposes of reviewing the amounts paid by 
the licensee and verifying the accuracy of any such payments, and only 
those employees of the copyright owner, authorized representative or 
agent who need to have access to such information

[[Page 29268]]

for such purposes will be given access to such information; provided 
that in no event shall access be granted to any individual who, on 
behalf of a record company, is directly involved in negotiating or 
approving royalty rates in transactions authorizing third party 
services to undertake licensed activity with respect to sound 
recordings. A licensee's statements of account, including any and all 
information provided by a licensee with respect to the computation of a 
subminimum, shall not be used for any other purpose, and shall not be 
disclosed to or used by or for any record company affiliate or any 
third party, including any third-party record company.

Sec.  385.23  Royalty rates and subscriber-based royalty floors for 
specific types of services.

    (a) In general. The following royalty rates and subscriber-based 
royalty floors shall apply to the following types of licensed subpart C 
of this part activity:
    (1) Mixed service bundle. In the case of a mixed service bundle, 
the percentage of subpart C of this part service revenue applicable in 
step 1 of Sec.  385.22(b)(1)(i) is 11.35%. The minimum for use in step 
1 of Sec.  385.22(b)(1)(ii) is the appropriate subminimum as described 
in paragraph (b) of this section for the accounting period, where the 
all-in percentage applicable to Sec.  385.23(b)(1) is 17.36%, and the 
sound recording-only percentage applicable to Sec.  385.23(b)(2) is 
21%.
    (2) Music bundle. In the case of a music bundle, the percentage of 
subpart C of this part service revenue applicable in step 1 of Sec.  
385.22(b)(1)(i) is 11.35%. The minimum for use in step 1 of Sec.  
385.22(b)(1)(ii) is the appropriate subminimum as described in 
paragraph (b) of this section for the accounting period, where the all-
in percentage applicable to Sec.  385.23(b)(1) and (3) is 17.36%, and 
the sound recording-only percentage applicable to Sec.  385.23(b)(2) is 
21%.
    (3) Limited offering. In the case of a limited offering, the 
percentage of subpart C of this part service revenue applicable in step 
1 of Sec.  385.22(b)(1)(i) is 10.5%. The minimum for use in step 1 of 
Sec.  385.22(b)(1)(ii) is the greater of--
    (i) The appropriate subminimum as described in paragraph (b) of 
this section for the accounting period, where the all-in percentage 
applicable to Sec.  385.23(b)(1) is 17.36%, and the sound recording-
only percentage applicable to Sec.  385.23(b)(2) is 21%; and
    (ii) The aggregate amount of 18 cents per subscriber per month.
    (4) Paid locker service. In the case of a paid locker service, the 
percentage of subpart C of this part service revenue applicable in step 
1 of Sec.  385.22(b)(1)(i) is 12%. The minimum for use in step 1 of 
Sec.  385.22(b)(1)(ii) is the greater of--
    (i) The appropriate subminimum as described in paragraph (b) of 
this section for the accounting period, where the all-in percentage 
applicable to Sec.  385.23(b)(1) is 17.11%, and the sound recording-
only percentage applicable to Sec.  385.23(b)(2) is 20.65%; and
    (ii) The aggregate amount of 17 cents per subscriber per month.
    (5) Purchased content locker service. In the case of a purchased 
content locker service, the percentage of subpart C of this part 
service revenue applicable in step 1 of Sec.  385.22(b)(1)(i) is 12%. 
For the avoidance of doubt, paragraph (1)(i) of the definition of 
``Subpart C of this part service revenue'' shall not apply. The minimum 
for use in step 1 in Sec.  385.22(b)(1)(ii) is the appropriate 
subminimum as described in paragraph (b) of this section for the 
accounting period, where the all-in percentage applicable to Sec.  
385.23(b)(1) is 18%, and the sound recording-only percentage applicable 
to Sec.  385.23(b)(2) is 22%, except that for purposes of paragraph (b) 
of this section the applicable consideration expensed by the service 
for the relevant rights shall consist only of applicable consideration 
expensed by the service, if any, that is incremental to the applicable 
consideration expensed for the rights to make the relevant permanent 
digital downloads and ringtones.
    (b) Computation of subminima. For purposes of paragraph (a) of this 
section, the subminimum for an accounting period is the aggregate of 
the following with respect to all sound recordings of musical works 
used in the relevant subpart C of this part offering of the service 
provider during the accounting period--
    (1) Except as provided in paragraph (b)(3) of this section, in 
cases in which the record company is the licensee under 17 U.S.C. 115 
and the record company has granted the rights to engage in licensed 
subpart C of this part activity with respect to a sound recording 
through the third-party service together with the right to reproduce 
and distribute the musical work embodied therein, the appropriate all-
in percentage from paragraph (a) of this section of the total amount 
expensed by the service provider or any of its affiliates in accordance 
with GAAP for such rights for the accounting period, which amount shall 
equal the applicable consideration for such rights at the time such 
applicable consideration is properly recognized as an expense under 
GAAP.
    (2) In cases in which the record company is not the licensee under 
17 U.S.C. 115 and the record company has granted the rights to engage 
in licensed subpart C of this part activity with respect to a sound 
recording through the third-party service without the right to 
reproduce and distribute the musical work embodied therein, the 
appropriate sound recording-only percentage from paragraph (a) of this 
section of the total amount expensed by the service provider or any of 
its affiliates in accordance with GAAP for such rights for the 
accounting period, which amount shall equal the applicable 
consideration for such rights at the time such applicable consideration 
is properly recognized as an expense under GAAP.
    (3) In the case of a music bundle containing a physical 
phonorecord, where the music bundle is distributed by a record company 
for resale and the record company is the compulsory licensee, the 
appropriate all-in percentage from paragraph (a) of this section of the 
record company's total wholesale revenue from the music bundle in 
accordance with GAAP for the accounting period, which amount shall 
equal the applicable consideration for such music bundle at the time 
such applicable consideration is properly recognized as revenue under 
GAAP, subject to the provisions of Sec.  201.19 of this title 
concerning the times at which distribution and revenue recognition are 
deemed to occur.
    (4) If a record company providing sound recording rights to the 
service provider for a licensed subpart C of this part activity--
    (i) Recognizes revenue (in accordance with GAAP, and including for 
the avoidance of doubt all applicable consideration with respect to 
such rights for the accounting period, regardless of the form or timing 
of payment) from a person or entity other than the service provider 
providing the licensed subpart C of this part activity and its 
affiliates, and
    (ii) Such revenue is received, in the context of the transactions 
involved, as applicable consideration for such rights,
    (iii) Then such revenue shall be added to the amounts expensed by 
the service provider solely for purposes of paragraph (b)(1) or (2) of 
this section, as applicable, if not already included in such expensed 
amounts. Where the service provider is the licensee, if the service 
provider provides the record company all information necessary for the 
record company to determine whether additional royalties are payable

[[Page 29269]]

by the service provider hereunder as a result of revenue recognized 
from a person or entity other than the service provider as described in 
the immediately preceding sentence, then the record company shall 
provide such further information as necessary for the service provider 
to calculate the additional royalties and indemnify the service 
provider for such additional royalties. The sole obligation of the 
record company shall be to pay the licensee such additional royalties 
if actually payable as royalties hereunder; provided, however, that 
this shall not affect any otherwise existing right or remedy of the 
copyright owner nor diminish the licensee's obligations to the 
copyright owner.
    (c) Computation of subscriber-based royalty rates. For purposes of 
paragraphs (a)(3) and (4) of this section, to determine the subscriber-
based minimum applicable to any particular subpart C of this part 
offering, the total number of subscriber-months for the accounting 
period shall be calculated, taking into account all end users who were 
subscribers for complete calendar months, prorating in the case of end 
users who were subscribers for only part of a calendar month, and 
deducting on a prorated basis for end users covered by a free trial 
period subject to the free trial royalty rate as described in Sec.  
385.24. The product of the total number of subscriber-months for the 
accounting period and the specified number of cents per subscriber 
shall be used as the subscriber-based component of the minimum for the 
accounting period.

Sec.  385.24  Free trial periods.

    (a) General provisions. This section establishes a royalty rate of 
zero in the case of certain free trial periods for mixed service 
bundles, paid locker services and limited offerings under a license 
pursuant to 17 U.S.C. 115. Subject to the requirements of 17 U.S.C. 115 
and the additional provisions of paragraphs (b) through (e) of this 
section, the free trial royalty rate shall apply to a musical work when 
a record company transmits or authorizes the transmission, as part of a 
mixed service bundle, paid locker service or limited offering, of a 
sound recording that embodies such musical work, only if--
    (1) The primary purpose of the record company in providing or 
authorizing the free trial period is to promote the applicable subpart 
C of this part offering;
    (2) No applicable consideration for making or authorizing the 
transmissions is received by the record company, or any other person or 
entity acting on behalf of or in lieu of the record company, except for 
in-kind promotional consideration used to promote the sale or paid use 
of sound recordings or audiovisual works embodying musical works or the 
paid use of music services through which sound recordings or 
audiovisual works embodying musical works are available;
    (3) The free trial period does not exceed 30 consecutive days per 
subscriber per two-year period;
    (4) In connection with authorizing the transmissions, the record 
company has obtained from the service provider it authorizes a written 
representation that--
    (i) The service provider agrees to maintain for a period of no less 
than 5 years from the end of each relevant accounting period complete 
and accurate records of the relevant authorization, and identifying 
each sound recording of a musical work made available through the free 
trial period, the licensed subpart C of this part activity involved, 
and the number of plays or downloads, as applicable, of such recording;
    (ii) The service is in all material respects operating with 
appropriate license authority with respect to the musical works it is 
using; and
    (iii) The representation is signed by a person authorized to make 
the representation on behalf of the service provider;
    (5) Upon receipt by the record company of written notice from the 
copyright owner of a musical work or agent of the copyright owner 
stating in good faith that a particular service is in a material manner 
operating without appropriate license authority from such copyright 
owner, the record company shall within 5 business days withdraw by 
written notice its authorization of such uses of such copyright owner's 
musical works under the free trial royalty rate by that service;
    (6) The free trial period is offered free of any charge to the end 
user; and
    (7) End users are periodically offered an opportunity to subscribe 
to the service during such free trial period.
    (b) Recordkeeping by record companies. To rely upon the free trial 
royalty rate for a free trial period, a record company making or 
authorizing the free trial period shall keep complete and accurate 
contemporaneous written records of the contractual terms that bear upon 
the free trial period; and further provided that, if the record company 
itself is conducting the free trial period, it shall also maintain any 
additional records described in paragraph (a)(4)(i) of this section. 
The records required by this paragraph (b) shall be maintained for no 
less time than the record company maintains records of usage of 
royalty-bearing uses involving the same type of licensed subpart C of 
this part activity in the ordinary course of business, but in no event 
for less than 5 years from the conclusion of the licensed subpart C of 
this part activity to which they pertain. If the copyright owner of a 
musical work or its agent requests a copy of the information to be 
maintained under this paragraph (b) with respect to a specific free 
trial period, the record company shall provide complete and accurate 
documentation within 10 business days, except for any information 
required under paragraph (a)(4)(i) of this section, which shall be 
provided within 20 business days, and provided that if the copyright 
owner or agent requests information concerning a large volume of free 
trial periods or sound recordings, the record company shall have a 
reasonable time, in view of the amount of information requested, to 
respond to any request of such copyright owner or agent. If the record 
company does not provide required information within the required time, 
and upon receipt of written notice citing such failure does not provide 
such information within a further 10 business days, the uses will be 
considered not to be subject to the free trial royalty rate and the 
record company (but not any third-party service it has authorized) 
shall be liable for any payment due for such uses; provided, however, 
that all rights and remedies of the copyright owner with respect to 
unauthorized uses shall be preserved.
    (c) Recordkeeping by services. If the copyright owner of a musical 
work or its agent requests a copy of the information to be maintained 
under paragraph (a)(4)(i) of this section by a service authorized by a 
record company with respect to a specific promotion, the service 
provider shall provide complete and accurate documentation within 20 
business days, provided that if the copyright owner or agent requests 
information concerning a large volume of free trial periods or sound 
recordings, the service provider shall have a reasonable time, in view 
of the amount of information requested, to respond to any request of 
such copyright owner or agent. If the service provider does not provide 
required information within the required time, and upon receipt of 
written notice citing such failure does not provide such information 
within a further 10 business days, the uses will be considered not to 
be subject to the free trial royalty rate and the service provider (but 
not the record company)

[[Page 29270]]

will be liable for any payment due for such uses; provided, however, 
that all rights and remedies of the copyright owner with respect to 
unauthorized uses shall be preserved.
    (d) Interpretation. The free trial royalty rate is exclusively for 
audio-only licensed subpart C of this part activity involving musical 
works subject to licensing under 17 U.S.C. 115. The free trial royalty 
rate does not apply to any other use under 17 U.S.C. 115; nor does it 
apply to public performances, audiovisual works, lyrics or other uses 
outside the scope of 17 U.S.C. 115. Without limitation, uses subject to 
licensing under 17 U.S.C. 115 that do not qualify for the free trial 
royalty rate (including without limitation licensed subpart C of this 
part activity beyond the time limitations applicable to the free trial 
royalty rate) require payment of applicable royalties. This section is 
based on an understanding of industry practices and market conditions 
at the time of its development, among other things. The terms of this 
section shall be subject to de novo review and consideration (or 
elimination altogether) in future proceedings before the Copyright 
Royalty Judges. Nothing in this section shall be interpreted or 
construed in such a manner as to nullify or diminish any limitation, 
requirement or obligation of 17 U.S.C. 115 or other protection for 
musical works afforded by the Copyright Act, 17 U.S.C. 101 et seq.

Sec.  385.25  Reproduction and distribution rights covered.

    A compulsory license under 17 U.S.C. 115 extends to all 
reproduction and distribution rights that may be necessary for the 
provision of the licensed subpart C of this part activity, solely for 
the purpose of providing such licensed subpart C of this part activity 
(and no other purpose).

Sec.  385.26  Effect of rates.

    In any future proceedings under 17 U.S.C. 115(c)(3)(C) and (D), the 
royalty rates payable for a compulsory license shall be established de 
novo.

    Dated: May 10, 2012.
Stanley C. Wisniewski,
Copyright Royalty Judge.
[FR Doc. 2012-11751 Filed 5-16-12; 8:45 am]
BILLING CODE 1410-72-P
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