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MUSIC LICENSING PART ONE: 

LEGISLATION IN THE 112TH CONGRESS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INTELLECTUAL PROPERTY, 

COMPETITION, AND THE INTERNET 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

NOVEMBER 28, 2012 

Serial No. 112–158 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 
(II) 

COMMITTEE ON THE JUDICIARY 

LAMAR SMITH, Texas, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

DENNIS ROSS, Florida 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

MARK AMODEI, Nevada 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

JARED POLIS, Colorado 

RICHARD HERTLING, Staff Director and Chief Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION, AND THE INTERNET

BOB GOODLATTE, Virginia, Chairman 

BEN QUAYLE, Arizona, Vice-Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

SANDY ADAMS, Florida 

MARK AMODEI, Nevada 

MELVIN L. WATT, North Carolina 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

JERROLD NADLER, New York 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

BLAINE MERRITT, Chief Counsel 

STEPHANIE MOORE, Minority Counsel 
(III) 

C O N T E N T S 

NOVEMBER 28, 2012 

Page 

OPENING STATEMENTS 

The Honorable Bob Goodlatte, a Representative in Congress from the State 

of Virginia, and Chairman, Subcommittee on Intellectual Property, Competition, and the Internet .................................................................................... 1 

The Honorable Melvin L. Watt, a Representative in Congress from the State 

of North Carolina, and Ranking Member, Subcommittee on Intellectual 

Property, Competition, and the Internet ............................................................ 38 

The Honorable Howard Coble, a Representative in Congress from the State 

of North Carolina, and Member, Subcommittee on Intellectual Property, 

Competition, and the Internet ............................................................................ 40 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, and Chairman, Committee on the Judiciary ..................................... 40 

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, Ranking Member, Committee on the Judiciary, and 

Member, Subcommittee on Intellectual Property, Competition, and the 

Internet ................................................................................................................. 41 

The Honorable Jason Chaffetz, a Representative in Congress from the State 

of Utah, and Member, Subcommittee on Intellectual Property, Competition, 

and the Internet ................................................................................................... 42 

The Honorable Howard L. Berman, a Representative in Congress from the 

State of California, and Member, Subcommittee on Intellectual Property, 

Competition, and the Internet ............................................................................ 49 

WITNESSES 

Joseph J. Kennedy, Chairman and Chief Executive Officer, Pandora Media, 

Inc. 

Oral Testimony ..................................................................................................... 52 

Prepared Statement ............................................................................................. 54 

Bruce Reese, President and Chief Executive Officer, Hubbard Radio, LLC, 

on behalf of the National Association of Broadcasters 

Oral Testimony ..................................................................................................... 60 

Prepared Statement ............................................................................................. 62 

David B. Pakman, Partner, Venrock 

Oral Testimony ..................................................................................................... 71 

Prepared Statement ............................................................................................. 73 

Jimmy Jam, Chair Emeritus, The Recording Academy, Record Producer, 

Songwriter, Recording Artist 

Oral Testimony ..................................................................................................... 74 

Prepared Statement ............................................................................................. 77 

Jeffrey A. Eisenach, Managing Director and Principal, Navigant Economics 

Oral Testimony ..................................................................................................... 79 

Prepared Statement ............................................................................................. 82 

Michael Huppe, President, SoundExchange, Inc. 

Oral Testimony ..................................................................................................... 124 

Prepared Statement ............................................................................................. 126 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The bill, H.R. 6480, the ‘‘Internet Radio Fairness Act of 2012’’ .......................... 4 
Page

IV 

Material submitted by the Honorable Jason Chaffetz, a Representative in 

Congress from the State of Utah, and Member, Subcommittee on Intellectual Property, Competition, and the Internet .................................................... 44 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Ranking Member, Committee 

on the Judiciary, and Member, Subcommittee on Intellectual Property, 

Competition, and the Internet ............................................................................ 165 

Prepared Statement of the Honorable Jared Polis, a Representative in Congress from the State of Colorado ........................................................................ 170 

Response to Questions for the Record from Joseph J. Kennedy, Chairman 

and Chief Executive Officer, Pandora Media, Inc. ............................................ 172 

Response to Questions for the Record from Bruce Reese, President and Chief 

Executive Officer Hubbard Radio, LLC .............................................................. 181 

Response to Questions for the Record from David B. Pakman, Partner, 

Venrock ................................................................................................................. 189 

Response to Questions for the Record from Jimmy Jam, Chair Emeritus, 

The Recording Academy, Record Producer, Songwriter, Recording Artist ...... 192 

Response to Questions for the Record from Jeffrey A. Eisenach, Managing 

Director and Principal Navigant Economics ...................................................... 194 

Response to Questions for the Record from Michael Huppe, President, 

SoundExchange, Inc. ............................................................................................ 196 

Prepared Statement of the Information Technology & Innovation Foundation 

(ITIF) ..................................................................................................................... 202

Letter from the Songwriters Guild of America, Inc. (SGA), the Music Creators 

North America alliance (MCNA), and the European Composer and Songwriters Alliance (ECSA) ....................................................................................... 213 

Letter from the American Society of Composers, Authors and Publishers 

(ASCAP); SESAC, Inc; Broadcast Music, Inc. (BMI); and the Nashville 

Songwriters Associaton International (NSAI) ................................................... 217 

Letter from The Recording Academy ..................................................................... 221 

Letter from the Washington Bureau, National Association for the Advancement of Colored People (NAACP) ....................................................................... 223 

Letter from musicFIRST ......................................................................................... 225 

Letter from the American Association of Independent Music (A2IM) ................ 227 

Letter from the American Federation of Labor and Congress of Industrial 

Organizations ....................................................................................................... 229 

Letter from Americans for Tax Reform .................................................................. 231 

Letter from the Council for Citizens Against Government Waste ....................... 233 

Letter from the Recording Industry Association of America (RIAA) ................... 235 

Letter from SAG-AFTRA ......................................................................................... 237 

Letter from SoundExchange ................................................................................... 239 

Prepared Statement of the Taxpayers Protection Alliance .................................. 241 

Prepared Statement of Public Knowledge ............................................................. 243 

Letter from the Future of Music Coalition ............................................................ 265 
(1) 

MUSIC LICENSING PART ONE: 

LEGISLATION IN THE 112TH CONGRESS 

WEDNESDAY, NOVEMBER 28, 2012 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INTELLECTUAL PROPERTY,

COMPETITION, AND THE INTERNET, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 11:30 a.m., in room 

2141, Rayburn House Office Building, the Honorable Bob Goodlatte 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Goodlatte, Smith, Sensenbrenner, 

Coble, Chabot, Issa, Jordan, Chaffetz, Griffin, Amodei, Watt, Conyers, Berman, Chu, Deutch, Sa ́nchez, Nadler, Lofgren, Jackson 

Lee, and Johnson. 

Staff Present: (Majority) David Whitney, Counsel; Olivia Lee, 

Clerk; and (Minority) Stephanie Moore, Subcommittee Chief Counsel. 

Mr. GOODLATTE. Good morning. This hearing of the Subcommittee on Intellectual Property, Competition, and the Internet 

on the Internet Radio Freedom Act will come to order. The title of 

today’s hearing is ‘‘Music Licensing Part One: Legislation in the 

112th Congress.’’ The focus of the discussion today will be legislation introduced by Congressman Jason Chaffetz, H.R. 6480, the 

‘‘Internet Radio Freedom Act.’’ Today’s hearing is the first in what 

I hope will be a series of hearings examining the nuances of music 

licensing. The Merriam-Webster Dictionary defines the word ‘‘system’’ in a number of ways. 

One of those is a harmonious arrangement or pattern. I’m not 

sure that definition is the one most suitable to describe the accumulation of laws and customs that govern the music licensing apparatus in the United States today. The complexity of our music 

licensing system is a result of a number of sometimes independent 

but often interdependent factors. For instance, there are distinctions that are based on one, the type of work, whether the work 

is a musical competition or sound recording; two, the type of right 

someone wishes to license, whether they want to distribute, reproduce or publicly perform the work; and even three, the type of technology they plan to use, whether they want to publicly perform the 

work by means of an analog radio or Internet radio broadcast. To 

be sure, there is often a need for fine distinctions in a subject area 

as complex and far reaching as copyright law. 
2 

And much of our work in this area is frequently devoted to examining how best to calibrate the law to ensure it achieves the right 

balance in a particular area. But from time to time, we need to 

step back from the pieces and look at how they fit into the whole. 

Music licensing is an area where it would benefit us to take a 

broader look. To their credit, under the leadership of Chairman 

Sensenbrenner, Conyers and Smith, this Committee began the 

process of seeking to modernize and bring some order to aspects of 

our music licensing system that have been slow to adapt. Indeed, 

four laws that originated in the Subcommittee that relate principally to or profoundly affect aspects of our music licensing system 

were enacted during the last decade. And the Committee and the 

Subcommittee devoted considerable effort to attempt to both resolve the longstanding debate over whether the United States 

should recognize a full performance right in sound recordings and 

modernize provisions in the Copyright Act that relate to the collective licensing of musical works. 

But there are many interconnected issues that have been raised 

by stakeholders on all sides that the Subcommittee needs to begin 

to carefully review and consider. These include the following: First, 

Representative Chaffetz and webcasters have raised the issues of 

rate standard parity in the sound recording compulsory license, 

section 114, and reform the adjudicatory and rate-setting processes. 

Second, sound recording stakeholders have raised the issue of applying the sound recording statutory license to terrestrial radio stations. This Committee reported a bill on that issue in 2009. 

Third, music publishers and webcasters have raised the issue of 

the rate standard in the musical work statutory license, section 

115, and suggested a need for parity of that standard across licenses. They have also raised the issue of reforming the musical 

works license, especially as it applies to use by digital services directly. 

Fourth, performing rights organizations that represent songwriters and publishers, such as ASCAP, have asked the Committee 

to examine broadly issues of music licensing, including current decisions by the rate court in New York and the continued utility of 

the consent decree. 

Fifth, some broadcasters have suggested that performing rights 

organizations that currently operate in the free market, such as 

SESAC, should be bound by a consent decree or legislation in a 

manner similar to that which binds their competitors, ASCAP and 

BMI. 

All of these issues need to be carefully examined as they all affect both the incentive to create new works for consumers to enjoy 

and innovation in the music and Internet industries. However, 

today we focus our attention on the Internet Radio Freedom Act. 

This legislation seeks to harmonize the rate-setting standard 

among Internet radio broadcasters and satellite and cable radio 

broadcasters by changing the rate-setting standard from the willing 

buyer/willing seller standard to a modified 801(b) standard, similar 

to what cable and satellite radio broadcasters currently operate 

under. It is worth noting that this legislation does not attempt to 

address the question of whether terrestrial radio should pay performance royalties. 
3 

In addition to harmonizing the rate standard, H.R. 6480 also contains numerous other provisions amending the procedures governing the music licensing, including changing the method by 

which copyright royalty judges are chosen. I am open to the idea 

of harmonizing the rate-setting standard to create more parity 

across music delivery platforms, but I many also concerned about 

ensuring that those who create and perform music are fairly compensated for their creative works. I hope today we will have a productive conversation about the issues, including; one, whether we 

should harmonize the rate standard at all; two, if so, whether the 

801(b) standard, the willing buyer/willing seller standard, or something in between is the right balance; and three, how adjusting the 

standard would affect innovation in the Internet radio market and 

compensation for artists in the long term. 

The need to protect intellectual property and the imperative to 

foster innovation are not mutually exclusive goals. We can and will 

promote both interests going forward. When we succeed, hopefully 

more of us will also agree that the copyright law, in general, and 

the music licensing system in particular, resemble that harmonious 

arrangement or pattern defined in Merriam-Webster’s Dictionary. 

I look forward to hearing the testimony of all of our expert witnesses today. And before we proceed to swear them in, I want to 

acknowledge and thank several members of our Committee for 

their service on this Subcommittee since they are leaving the Congress. And I don’t see any of them with me here today, so maybe 

they’ve already left. But I still think it is worth noting their contribution to this Subcommittee. 

And I first want to mention Representative Howard Berman, 

next Representative Dan Lungren, Representative Mike Pence, 

Representative Ben Quayle and Representative Sandy Adams. And 

in their absence, let’s give them all a round of applause for their 

service to this great Subcommittee. 

[The bill, H.R. 6480, follows:] 
4 

112'1'H CO::-JGltESS 2D SE88IOK H.R.6480 

1'0 adopt fair standards and procedures by which determillations of Copyright 

Royalty ,JudgeR are made with respert to wehrm,ting, and for other pnl11oses. 

IK THE HOUSE OF REPRESENTATIVES 

8EPTilllVIBER 21, 2012 

Mr. CHLti'l<'ET:O (for himself, Mr. POLIO:, Mr. IO:SA, and }Is. ZOl'; LCWGK4;N of 

California) introdneed the following bill; whieh was referred to the Committee 011 the Judie.iar,Y 

A BILL 

To adopt fair standards and procedures by ·which determinations of Copyright Royalty ,Judges are made with l'espect 

to webcasting, and for other purposes. 

Reit enacted by the Senate and HOILse of Representa2 iI>ues afthe United States afArrwric(~ in 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the "Internet Radio Fair5 ness Act of 2012". 

6 SEC. 2. APPOINTMENT OF COPYRIGHT ROYALTY JUDGES 

7 AND QUALIFICATIONS. 

8 Chapter 8 of title 17, United States Code, is amenc1-

9 ec1-
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(1) ill section 801 (a)-

(A) in the fin;t 8entenee, by 8triking "Librarian of Congress" and inserting "President 

of the United States, by and with the advice 

and consent of the Senate,"; and 

(B) by striking the second sentence; and 

(2) in section 802-

(A) m subsection (a)(I), by striking 

"Each" and all that folIo viiS through "econolllics." and inserting the follovving: "Each Copyright Royalty ,Judge shall be an attorney who 

has not fewer than 10 years of legal e).11erience 

and has significant experience in ac\judicating 

arbitrations or court trials. The Chief CopYTight 

Royalty Judge 8ha1l have not fewer them 7 

years of e).l)(Tienc(' in adjudicating court trials 

ill civil cases."; and 

.HR 6480 IH 

(B) in subsection (d)-

(i) in paragraph (1), in the fin.;t 8entence, by striking "Ijibrarian" and all that 

follows through "section." and inserting 

"President of the United States shall act 

expeditiously to fill the vacancy."; and 

(ii) in paragraph (2), by striking "Librarian of Congress" and inserting "Presi-
6 

2 

3 

dent of tlle United States, by and ,,~th tlle 

advise and consent of tbe Senate,". 

3 SEC. 3. COMPUTATION OF ROYALTY FEES FOR INTERNET 

4 

5 

6 

7 

RADIO SERVICES OFFERING DIGITAL PERFORMANCES OF SOUND RECORDINGS AND 

REPORTING OBLIGATIONS. 

STANDARD FOR DETERMINING RATES ~'illD 

8 TERMS; BL"RDEN OF PROOF.-

9 (1) EPHEMERAL RECORDINGS.-Seetion 112(e) 

10 of title 17, United States Code, is amended11 (A) in paragraph striking the see12 ond sentence and inserting the follmving: "Such 

13 rates may include a minimulll aunual fee for 

14 each type of service offered by the transmitting 

15 organization."; 

16 (I3) in paragraph (4), hy striking "Such 

17 rates shall" and all that follows through "par-a18 gTaphs and (3)." and inserting the fol19 lowing: "In establishing rates and ternu; umler 

20 this paragTaph, the Copyright Royalty ,Judges 

21 shall apply the objectives set forth in section 

22 801 (b)(l), in accordanee "rith suhparagraphs 

23 and (D) of section 114( f)( 1). In any pro24 ceeding under this paragraph, the burden uf 

25 proof shall be on the copyrig>ht ovmers of sound 

.HR 6480 TH 
7 

4 

recordings to establish that tlle fees and terms 

2 that they :seek :sati:sty the recluirernent:s of thi:s 

3 paragTaph, and do not exceed tlle fees to 'which 

4 most copyright owners and users would agree 

5 under competitive market circumstances. To tlle 

6 extent the Copyright Royalty Judges consider 

7 marketplace benchmarks to be relevant, they 

8 shall limit those benchmarks to benchmarks re9 fleeting the rates and terms that have been 

10 agTeed under competitive market circumstances 

11 by most copyright users."; and 

12 (C) in paragTaph (5), hy striking "in lieu 

13 of any" and all that follows and inserting the 

14 follmving: "and be binding upon the parties to 

15 any :sueh agTeernent:s in lieu of any determina16 tion hy the Copyright Royalty ,Tudges.". 

17 (2) DIGITAL SOUND RECORDIXG PERFORM18 ANCES.-Section 114(f) of title 17, United States 

19 Code, irs amended20 in paragrapll (1)-

21 (i) in subparagraph (A)-

22 (1) in the first sentence23 (aa) by striking "subscrip24 tion transmissions by preexisting 

25 subscription services and trans-

.HR 6480 IH 
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.HR 6480 IH 

5 

mlSSlOns by preexisting satellite 

digital audio radio"; and 

(bb) by striking ", except 111 

the case of a different transitional period pn)\~decl under section 6 (b) (3) of the Cop:yright 

Royalty and Distribution Reform 

Act of 2004, and 

(II) by str'iking "Such terms and 

rates" and all that follows and inserting the following: "Such terms and 

rates shall disting11ish among the different types of digital audio transmission services then in operation and 

may take into account the different 

charaderistics of snch services, and 

may include a minimum annual fee of 

not more than $500 for eacll pnwider 

of services that is sut~ject to such 

rates and terms, which may be tlle 

only minimum fee for such provider 

and may be assessed only once ammally to that provider. Any cop:yright 

owners of sound recordings or any entities performing sound recordings af-
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.HR 6480 IH 

6 

fected by t11is paragrRp11 may suhmit 

to the Copyright Royalty Judges for 

com.:ideration ill such rate-setting proceedings licenses covering such noninteraetive sound recording performances. The parties to each proceeding 

shall bear their (}wn costs."; 

(ii) in subparagraph (B)-

(I) in the first sentence-

(aa) by striking "paragraph 

and inserting "'paragraph 

(2r'; and 

(bb) by striking ", a transitional period provided under section 6(b)(8) of the Copyright 

Royalty and Distrihution Reform 

Act of 2004,"; and 

(II) by striking the seeolld sentenee and inserting the follovving: "In 

establishing rRtes and terms under 

this paragraph, the Copyright Royalty 

,Judges s11a]] apply the objectives set 

forth in section 801(b)(1) and may 

also consider the rates and terms for 

noninteractive digital audio trans-
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mission services under voluntary 1icen~e ag'reement~ de~cribed in ~ubparagraph (A) that were entered into 

under competitive market CIrcumstances. In any proceeding under 

this subsection, the burden of proof 

shall be on the copy-r-ight ovvners of 

sound recordings to establish that the 

fees and terms that they seek satis~y 

the requirements of this subsection, 

and do not exceed the fees to which 

most cOP:':Tight mVllcrs and uscrs 

would agree under competitive market 

circumstances." ; 

(iii) by rede~ignating ~ubparagTaph 

(e) as subparagraph (E); 

(iv) by inserting after subparagraph 

(R) the follmving: 

"(C)(i) In con~truing the ol~jeetive~ ~et 

forth in section 801 (b)(l), the Copyright Royalty Judges shall take into consideration-

.HR 6480 JH 

"(Il the public's interest in both t11e 

creation of new sound recordings of musical works and in fostering online and other 
11 

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digital performances of sOlmd recordings; 

and 

"(II) the income necessary to prov~de 

a reasonable return on all relevant investments, including investments in prlOr perlods for which returns have not been 

earned. 

"(ii) To the exi;ent the Copyright Royalty 

Judges consider marketplace benchmarks to be 

relevant, the Copyright Royalty Judges shall 

limit thuse benchmarks to benchmarks reflecting the rates and terms that have heen agreed 

under competitive market circumstances by 

most cop:yright users. 

"(D) In applying the u~jectives set forth in 

section ROl(b)(l), the Copyright Royalty 

.Tudges-

.HR 6480 JH 

"(i) shall not disfavor percentage of 

revenue-based fees; 

"(ii) shall establish license fee structures that foster competition among the 

licensors of SOlllld recording performances 

and between sound recording performances 

and other programming, including per-use 

or per-program fees, or percentage of rev-
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enue or other fees that include carve-outs 

on a pro-rata basis for sound recordings 

the performance of whicll have been licensed either directly with the copyright 

owner or at the source, or for whicll a license is not necessary; 

"(iii) shall give full consideration for 

the value of any promotional benefit or 

other nOll-monetary benefit conferred on 

the COpy Tight owner by the performance; 

"(iv) shall give full consideration to 

the contribntions made by the digital andio 

transmission service to the eontent and 

value of its programming; and 

"(v) shall not take into account either 

the rates and terms provided in licenses for 

interactive services ()[. the determinations 

rendered by the Cop}Tight Royalty ,Judges 

prior to the enactment of the Internet 

Radio Fairness Act of 2012."; and 

(v) by amending subparagraph (E l, as 

so redesignated, to read as follows: 

"(E 1 The procedures under subparagraph 

(A) may also be initiated pursuant to a petition 

filed by any copyright uwners of sound record-

.HR 6480 IH 
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23 

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mgs, or allY entity pelforming sound recordillgs 

affected by this paragTaph, indicating that a 

new type of digital audio tram:mission serVlCe 

engaged in the public performance of sound recordings is or is about to become operational, 

for the purpose of determining reasonable terms 

and rates of royalty paylnents with respect to 

such new type of transmission service for the 

period beginning with the inception of such new 

type of service and ending on the date on 'which 

the ruyalty rates and terms for the most COlllparable digital 31uiio transmission services most 

recently determined under subparagt'aph (A) 

and chapter 8 expire, or such other period as 

the parties may agTee."; 

(B) by striking paragraph (2); 

(C) by redesignating' paragraphs ( 4), 

and (5) as paragraplls (2), (3), and (4), respectively; and 

.HR 6480 IH 

(D) in paragraph (2), as so redesig1lated-

(i) by inserting "or their authorized 

represelltatives" after "mvners of sound recordings"; and 

(ii) by str~king "in lieu of any" and 

all that follows and inserting the following: 
14 

11 

"ancl be binding upon the parties to any 

2 sueh agTeements in lieu of any determina3 tion by the Copyright Royalty ,Jlldges.". 

4 (3) DEFINITION.-Section 114(j) of title 17, 

5 United States Code, is amended6 (A) by redesignating paragraphs (4) 

7 through (15) as paragraphs (5) through (16), 

8 respectively; and 

9 (B) by inserting after' paragraph (3) the 

10 following: 

11 "( 4) 'Competitive rnarket circumstances' are 

12 cirrumstanres in which a lirensee enters into a li13 cense for the noninteractive perf()['mance of sound 

14 recordings with a licensor that does not possess mar15 ket power resulting from the aggTegation of eopy16 rights, either hy a licensing collective or incli'virlual 

17 copyright owners.". 

18 (b) PH.l<J(~EJ)I~N'I'IAI, VAI,UJ cw SE'I"I'I,EIVlW\'I'S.-Sec19 tion 114(f)(4) of title 17, United States Code, as so redes20 ignated by subsection (a)(2), is amended21 ( 1) in subparagraph (B), by striking the second 

22 sentence; 

23 (2) by striking subparagraphs (C) and (F): 

24 by redesignating subparagraphs (D) and 

25 (E) as subparagraphs (C) and (D), respectively; and 

.HR 6480 IH 
15 

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(4) by adding at the end the follm'~llg: 

"(j1~) The rates and terms of any settlements made pursuant to the amendments made 

by the \Vebcaster Settlement Act of 2009 (Public Im.w 111-36; 123 Stat. 1926) that were to 

e:rq)ire before December 31, 2015, shall be extended through Decernber 31, 2015, according 

to the rates and terms applicable to 2014.". 

9 (c) TECH~""IGA_L ~'L.~D CONFORMING A~VIENDlV[ENTS.-

10 Chapter 8 of title 17, United States Code, is amended11 (1) m section 801(b)(7)(B), by striking 

12 "114(f)(3)" and inserting "114(f)(2r'; 

13 (2) in seetioIl 803(c)(2)(E)(i)(II)-

14 (A) by striking "seetion l1'1(f)(I)(C) or 

15 114(f)(2)(C)" and inserting "section 

16 114(f)(I)(E)"; and 

17 (B) by striking "section 114(f)(4)(B)" and 

18 inserting "section 114(f)(3)(R)"; ancl 

19 (3) in section 804(b)(3)(C)-

20 (A) in clanse (i), by striking "seetion 

21 114(f)(I)(C) and 114(f)(2)(C)" and inserting 

22 "seetioll 114(f)(1 )(Er'; 

23 (B) in clause (iii)(II), by striking "section 

24 114(f) (4) (B) (ii) and and inserting "sub-

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paragTaphs (B)(ii) and 

114(f)(3)"; and 

of section 

(C) in clause (iv), by striking "section 

114(f)(1)(C) or 114(f)(2)(C)" and inserting 

"section 114(f)(1)(Er'. 

6 SEC. 4. MODERNIZATION OF CONDITIONS GOVERNING 

7 

8 

EPHEMERAL RECORDING EXEMPTION AND 

STATUTORY LICENSES. 

9 (a) EPHEMERAL RECORDING EXElVIPTION.-Section 

10 112(a)(1) of title 17, United States Code, is amended by 

11 striking "no more than" and all that follovvs and inserting 

12 the follmving: "1 or more ropies or phonorecords emhody13 ing the perfol'manee or display, if14 "(A) the eopies or phonorecords are re15 

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tained aml used solely by the transmitting organization that made them, and no further copies 

or phonorecords are reprodueecL from them, except as may be incidental to the operation of 

the transmission technology used by the transmitting organization; and 

"(B) the copies or phon ore cords are used 

solely for the transmitting organization's mvn 

transmissions originating in the United States, 

or for pUl1)oses of archival preservation or security." . 

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(b) EPHl~.Vll~H.AL RI'~COH.J)JNG STA'l'LT'I'OHY Ijl2 CENSE.-Seetion 112(e)(1) of title 17. United States 

3 Code, is amended4 (1) in the matter preceding subparagraph (Al5 (A) by striking ;;01' under a statutory li6 cense in accordance with section 114( f) "; and 

7 (B) by striking "if the following conditions 

8 are satisfied:" and inserting "if-"; 

9 in subparagraph (A)-

10 (A) by striking "The" and inserting "the"; 

11 and 

12 (13) hy striking the period at the end and 

13 iuser·ting ", exeept as may be incidental to the 

14 operation of the transmission technology used 

15 by the transmitting organizatiun;"; 

16 un in suhparagraph (13)-

17 (A) by striking "The" and irmerting "the"; 

18 (B) by striking ';a statutory lieense in ae19 curdance with sectiun 114(f) or"; and 

20 (C) by striking the period at the end and 

21 inserting ", or for purposes of archival preser22 vation or seeurity; and"; 

23 (4) by striking subparagraph 

24 (:5) by redesignating subparagraph (D) as sub25 paragraph (e)i and 

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(6) m subparagTaph (C), as so redesignated, by 

2 :striking "Phonorecord:s" and in:serting "phonorec3 ards". 

4 (c) SOUND RECORDING PERFORl\IA..~CE STATUTORY 

5 TjICENSI~.-Sectioll 114(d)(2)(C) of title 17, United 

6 States Code, is amended7 (1) in clause (i), by striking "of a broadcast 

8 transmission" and all that follovvs and inserting the 

9 following: "or simultalleous transmission of a broad10 cast transmission in any medium, which may include 

11 programmmg substituted for progTanUllll1g con12 tained in the hroadcast transmission with respect to 

13 which the transmitting' entity lacks the requisite li14 censes or clearances to make the transmission in the 

15 medium, or for adverti:sement:s contained in the 

16 broadcast tram:;mi;;:;;;:;ion, or the transmi;;:;;;:;ion of any 

17 progranllniug previously included in a broadeast 

18 trallsmissioll as an arehived progTam in cOllformanee 

19 with elau:se (iii);"; 

20 (2) by striking clause (ii) and inserting the fol21 lowing: 

22 "(ii) the transmitting entity 

23 does not cause to be published in 

24 writing by means of an advance 

25 program schedule the titles of the 

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specific sound recordings or 

phonoreeonh; embodying such 

sonnd recordings to be transmitted at particular times, except 

that this clause does not disqualify a transmitting entity that 

publishes in writing-

"Clh~) such a program 

schedule that identifies 

sound recordings, phonorecords or artists that ,v~ll be 

featured within a period of 

time greater than :3 hours or 

,\rithin an unspec.ified future 

time period; or 

"(BB) an advance program schedule that IS a 

schedule of classical mUS1C 

programmmg to be performed as part of a retransmISSIOn or simultaneous 

transmission of a broadcast 

transmission, which may include programmmg substituted for programming 
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contained 111 the broadcast 

tnmsrnission vvith respect to 

"vhich the transrnitting entity lacks the requisite licenses or clearances to make 

the transmission in the medium, or for advertisements 

contained in the broadcast 

transmission;" ; 

(3) in clause (iii)-

(A) in subclause (II), by adcl1ng "or" at 

the eml; a11(l 

(B) beginning in subclause (III), by strikmg "or" and all that follows through "requirement;"; 

(4) in clause (vii)-

(A) by striking "and the transmitting entity" through "of the cop;vrigllt owner,"; alld 

(B) by striking "of a broadcast transmissioll" and all tllat follows and inserting "or 

simultaneous transmission of a broadcast transmlSSlOll, which may illclude programmillg substituted for programming contained in the 

broadcast transmission vlith respect to vl'llich 

the transmitting entity lacks the requisite li-

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censes or clearances to make the transmission 

in the medium, or for advertisements contained 

in the broadcast transmission;"; and 

( 5) by amending clause (ix) to read as follows: 

"(ix) the transmitting entity identifies 

in textual data the sound recording during, 

but not before, the time it is performed, including the title of the sound recording 

and the featw'ed recording artist, in a 

manner to permit it to be displayed to the 

transmission recipient by the device or 

tcrhllology intended for rereiving the selvice pt'ovided the transmitting entity, except that the obligation in this clause shall 

not apply to the extent that the transmitting entity docs not have the terhnology or 

information necessary to provide such textual data.". 

19 SEC. 5. PROMOTION OF A COMPETITIVE MARKETPLACE. 

20 (a) TjllVll'l'A'I'ION 01,1 ANTITK.UST EXI~MI"I'IONS.-

21 (1) EPHEMERAL RECORDINGS.-Section 

22 112(e)(2) of title 17, United States Code. is amend23 ed24 (A) by inserting ", on a nonexclusive 

25 basis," after "common agents"; and 

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(B) hy adding at the end the follmving: 

2 "Nothing in this paragnlph shall be eonstrued 

3 to permit any eopyrigl1t owners of sound re4 eordings acting jointly, or any eommon agent or 

5 eolledive representing snch eopyright owners, to 

6 take any aetion that would prohihit, interfere 

7 with, or impede clired lieensing hy cop:yl'-ight 

8 mvners of sound recordings in competition ,vith 

9 lieensiug by any eommon agent 01' eolledive, 

10 and any such adion that affects interstate eom11 meree shall be deemed a eontrad, eombination 

12 or conRpiracy in restraint of trade in violation 

13 of seetioll 1 of the Sherman Ad (15 U.S.C. 

14 1).". 

15 DIGITAL SOUND RECORDIXG PERFORM16 ANCES.-Section 114(e) of title 17, United StateR 

17 Code, is amended by adding at the end the fol18 lmving: 

19 "(3) Nothing in this subseetion shall be eon20 strued to permit any eopyright ovvners of sound re21 cordings aeting jointly, or any common agent or col22 ledive representing sueh copyright owners, to take 

23 any aetion that would prohihit, interfere with, or im24 pede direct lieensing hy copyright mVl'lerS of sound 

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mon agent or collective, and any such action that af2 feet8 inter8tate commerce 81mll be deemed a (5on3 tract, combination or conspiracy in restraint of trade 

4 in violation of section 1 of the Sherman Act (15 

5 U.S.C. 1). 

6 "( 4) In order to obtain the benefits of para7 graph (1), a common agent or collective representing 

8 copyright OvvLlers of sound recordings must make 

9 available at no charge through publicly aceessible 

10 computer access through the Internet the most cur11 rent available list of sound recording copyright ovm12 ers represented by the organization and the most 

13 currellt list of sound reeordings lieensed by the orga14 nization.". 

15 SEC. 6. PROCEEDINGS OF THE COPYRIGHT ROYALTY 

16 JUDGES AND ,JUDICIAL REVIEW. 

17 (a) PROCEEDINGS A~v PRECEDENTL'UJ VALrE.-

18 Section 803(a)(1) of title 17, rllited States Code, is 

19 arnended20 (1) by striking the first sentence and inserting 

21 the follmving: "'In carrying out the pUl110ses set 

22 fortll in seetion 801, all proceedings of the Cop:yright 

23 Royalty Judges shall be conducted in accordance 

24 vvith this title and, unless contrary to a procedure 

25 set forth in subsection (b), according to the Federal 

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Rules of Civil Procedure and the Federal Rules of 

2 Evidence."; and 

3 (2) by adding at the end the following: "Not4 vvithstanding the preceding sentence, in any rate-setS ting proceeding under section 112(e)(4) or section 

6 114(f)(2)(B), the CopyTight Royalty Judges may 

7 only consider as precedent and aet in accordance 

8 vvith determinations and interpretations that are 

9 made under the objeetives set forth in section S01(b) 

lO for the statutory licenses under sections 112(e) and 

11 114(d)(2).". 

12 (b) RECHTLATIONS.-Section 803(h)(6) of title 17. 

13 United States Code, is alllended14 (1) in subparagraph (C), by striking "RE15 QUIREMENTS.-Hegulatiom;" and inserting "HE16 QTTIREl\IENTS IT CASES NOT INVOL,TING DIGITAL 

17 PERFORlVLt'u'fCES OF SOUND RECORDINCiS.-Ill pro18 ceedings other than proceedings to determine terms 

19 and rates of royalty payments under section 112 or 

20 114, reg11lations"; and 

21 (2) by adding at the end the follmving: 

22 "(D) REQUIH.I~lvIENTS IN PHOCI~I~j)jNGS IN23 VOLviNG DIGITAL PERFORlVIA..1\ICES OF SOUND 

24 RECORDINGS.-In proceedings to determine 

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terms and rates of royalty payments under section 112 or 114, the follmving shall apply: 

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"(i) INITIAl, DlSCI£)SCHI~S.-~ot later 

than 30 days after the date on which the 

voluntary negotiation period is initiated 

pursuant to paragraph (3)(A)(i), each participant shall make an initial disclosure to 

the other participants by providing cop1e8-

"(I) of all license agreements entered into by that participant, its 

memhers, or any licensor or licensee 

represented in the proceeding by that 

participant during the applicable 5-

year period or covering any portion of 

the period for which the rates are to 

be set, relating to-

"(aa) in a proceeding under 

section 112, the making of 

ephemera] recordings; or 

"(bb) in a proceeding under 

section 114, t11e Pl1blic performance of musical works, sound recordings, or audiovisual works in-
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corporating recorded 

works; or 

nmsical 

"(II) of any other license agreement or document upon which the 

participant intends to rely, in whole or 

in part, in its ratemaking proposal, as 

,veIl as all license agreements entered 

into by the participant, its members, 

01' any licensor or licensee represetlted 

in the proceeding by that participant 

for the same or similar rights during 

the applicahle ;:)-year pel'ioa or covering any portion of the period for 

which the rates are to be set. 

"(ii) PROTECTIVE ORDER; S}u'l'CTIONS.-Disclmmres unaer clause (i) ana 

other confidential information produced by 

a participant or third party during discovery, or used during the proceeding, 

shall be sllbject to a protective order, e11-

tered by the CopyTight Royalty Judges in 

the proceedi11g, t11at prohibits llse of t11e 

disclosures and the confidential information for any pur1)ose other than the proceeding and that prohibits disclosure of the 
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licenses or other docmnents inchlded ill tlle 

diselmmre or of other confidential information to any person that is llot cmmsel of 

record in the proceeding. The CopyTight 

Royalty ,Judges may impose appropriate 

sanctions for failure to comply in a timely 

manner ,.',~th the matters required to be 

disclosed under clause (i). 

"(iii) STATKVIENTS OF THE CASE.-

Statements of the case shall be filed by a 

date specified by the Copyright Royalty 

,Judges, whirh for lirensor pflIt.iripants 

shaH be no earlier than the elld of the 90-

day period beginning on the date on ,yhich 

the voluntary negotiation period coneludes, 

and for licensee participants shall be no 

earlier than the end of the 60-day period 

beginning on the date 011 vvhich tlle statements of the ccu:;e are required to he submitted by licensor participants. 

"(iv) SUBPOENA po\\'ER.-The Copyright Royalty ,Jlldges shall have the pmver 

to issue subpoenas at the request of a participant to non-participants, subject to the 

Federal Rules of Civ~l Procedure. Orders 
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by the Cop:yright Royalty ,Judges to enforce such subpoenas may be enforced by 

the requesting participant in an action in 

the district court in vvhich the subpoenaed 

party resides. 

"(v) SCHEDULING CONFEREXCE.-

The Cop:yright Royalty ,Judges shall order 

a scheduling conference no sooner than 45 

days following the submission to the Copyright Royalty Judges of the statement of 

the case of the licensee participants. Participants shall suhmit jointly a proposed 

discovery pIau no later' than 21 days before 

the conference. Following the conference, 

the Copyright Hoyalty Judges shall issue 

an initial scheduling (WI1cr governing pretrial procedures, and per'mitting discovery 

that is reasonable and sllfficient, glvlng 

due consideration to the proposals of the 

participants and the magnitude of the potential royalty pa:yrnents at issue during 

the license period covered by the proceeding. The period to conduct discovery 

shall be no shorter than 90 days, plus the 

time needed to complete discovery ordered 
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by the Copyright Royalty .Judges in C011-

nection with the re:solution of motion:s, orders, and disputes pending at the end of 

such period. 

"(vi) SI~'l''I'I,KVI1~NT CONI<'I~H.I;JNCI;J.­

The Cop:yright Royalty Judges shaH order 

a settlement conference among the participants in the proceeding to facilitate the 

presentation of offers of settlement among 

the participants. The settlement conference 

shall be held during the 21-day period beginning on the day after the last day of the 

discovery per·iod ordered pursuant to clause 

(iv) and shall take place outside the presence of the Copyright Hoyalty J udg-e:s. 

"(vii) ,TOINT PRETRBL ORDER.-If 

the conference required in elause (v) does 

not result in a settlement among all partie:s, not later than 60 da;n; after the la:st 

day of the settlement conference, the remaining participants shall propose a joint 

pretrial order-

"(I) stating the rates and terms 

proposed by each participant and set-
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ting forth, m detail, the gTOlmds for 

sueh proposals; 

"(TI) setting forth admissions 

and stipulations about facts and docunwnts; 

"(III) avoiding unnecessary proof 

and cumulative evidence and limiting 

the use of testimony under rule 702 of 

the Federal Rules of Evidence; 

"(IV) identif}ing the witnesses to 

be offered by each party, and attaching all witness statements, testimony, 

and exhibits to be presented ill the 

proceeding and such other information 

that is neeessary to establish terrm; 

and rates; 

"(V) listing the evidence to be offered by each party, and identiry-ing 

any objediom; to any sueh evidenee; 

"(vi) identiry-ing any pending 

motions, including motions in limine 

and attaching any such motions that 

have not yet been filed; 
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"(VTl) proposmg a reasonable 

limit on the time allowed to present 

ev~dellce; and 

"(v"1II) proposing other ways to 

facilitate the just, speedy, and inexpensive disposition of the proceeding. 

"(viii) PHETHLMJ OHDER-The Copyright Royalty Judges shall hold a prehearilll2' conferellce to address the issues 

set forth in the proposed joint pretrial 

order, and shall issue an order reciting the 

action taken. The order shall allocate to 

the licensor participallts and licensee participants sufficient, reasonable, and equal 

time in which to present their respective 

cases, and shall afford each set of participallts an opportunity for rebuttal. The 

order issued by the Cop:yright Royalty 

J udge8 under thi8 elau8e shall control the 

course of the action unless the ,Judges 

modify it. 

"(ix) DIWINI'l'IONS.-In this subparagraph: 
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"(T) ApPLlCAHlJI~ 5-YEAH, PI'JRIOD.-The term 'applicable 5-year 

period' meansthe period of 5 calendar years precpding the year in 

which the applicable voluntary 

negotiation period begins: and 

"(b b) the period of the current calendar year through the 

date on which the initial disclosure under clause (i) is lnade. 

"(II) LICENSEE.-The term 'licensee' means a person or entity that 

exercises rights under a statutory license under section 112 or 114. 

"(III) LICENSEE P~'!RTICIPA1'JT.­

The term 'licensee participant' means 

a participant that is, or is an authorized representative of, a licensee. 

"(TV) TjICl'JN80H.-The term 'licensor' means a person or entity entitled to receive royalty pa:yments under 

section 112 or 114. 

"(V) IJICEN80R PARTICIPA.NT.-

The term 'licensor participant' means 
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a participant that is, or that is an authorized representative of, a lieensor. 

"(vi) 

CASE.-The term 'statement of the 

case' means a sllort and plain statement tllat-

"(aa) identifies all participants and licensors or licensees 

on whose behalf the statement is 

being submitted; 

';(bb) states the proposed 

rate or rates and terms of the 

participants for each right at 

Issue in the proceeding and sets 

forth in detail the basis of eaeh 

:-;u('h proposed rate anel term: 

"( cc) identifies each witness 

that the participant intends to 

eall in support of its rate and 

terms proposal and summarizes 

the anticipated testimony of each 

"\V~tlless; and 

"(dd) includes any reports, 

including e}qJert reports, and any 
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documents upon wllich tlle par2 tieipant relies.". 

3 TLVIING 01" DI~'I'lml\IlNATION.-Section 803(e)(1) 

4 of title 17, United States Code, is amended by striking 

5 "subsection (b)(6)(C)(x)" and illserting "subparagraph 

6 (C)(x) or (D)(v) of subsection (b)(6) (as the case may 

7 be)". 

8 (d) JUDICL'lli REvIEw.-Section 803(d)(3) of title 

9 17, United States Code, is amended by striking' the first 

10 sentence and inserting the following: "Conclusions of 1m',', 

11 and determinations of rates in which the Cop:yright Roy12 alty ,Judges arc required to apply the facts of record to 

13 the ol~jeetives set forth in section 80l(b) shall be su~jeet 

14 to de novo review. Findings of fact by the Cop:yright Roy15 alty ,Judges shall be su~jeet to review for clear error. lUI 

16 other actions by the Copyright Royalty ,JudgeR Rhall be 

17 su~ject to review for abuse of discretiotl.". 

18 SEC. 7. GLOBAL MUSIC RIGHTS DATABASE. 

19 Por purposes of facilitating eompensation to artists 

20 of musical works and combating copyTight infringement, 

21 not later than 180 days after the date of enactment of 

22 tllis Act, the Tjibrarian of Congress, in consultation \\~th 

23 the Intellectual Property Enforcement Coordinate and the 

24 United States Patent and Trademark Office, shall submit 

25 to Congress a report that provides a set of recommenda-

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tiOllS about how the Federal Government can faf'ilitate, 

2 and pm;sibly establish, a global music registry that is 

3 sustainably financed and consistent with "World Intellec4 tual Property Organization obligations. Such registry 

5 should, to the eAient practicable, include all known or 

6 copyrighted musical works, the 'writers of the work, the 

7 ovvners of the rights, the entity on behalf of those owners 

8 who can license such rights on a territory-by-territory 

9 basis, and all known sound recor-ding data. 

10 SEC. 8. EFFECTIVE DATE AND TRANSITIONAL RULES. 

11 (a) IN GENEILUJ.-Except as provided in subsection 

12 ( c), the amendments made hy this Act shall take effef't 

13 on the date of enactment of this Act and shall apply to 

14 any proceeding that is pending on, or that begins on or 

15 after the date of enactment. The Copyright Royalty 

16 ,Judges in office as of the date of enactment shall have 

17 only sueh continuing authority as is provided in pal'a18 graphs (1) and (2) of subsection (c). 

19 (b) HEGULATIONS.-Not later than 60 days after the 

20 date on wllich not less than 2 Copyright Royalty ,Judges 

21 are appointed and confirmed pursuant to section 2, the 

22 Copyright Royalty ,Judges shall propose regulations imple23 menting the amendments set forth in section 6(b), by no24 tiee in the Federal RegiBter, providing 30 days for COlll25 ments and 15 days for reply comments. Not later than 

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45 days after the date on which the 1 E)-day period for 

2 reply connnents ends, the Copyright Royalty Judge8 shall 

3 promulgate final reg11lations. 

4 (c) ApPLICABILITY TO PENDING PROCEEDINGS.-

5 (1) PW)CI~I~DlNGS IN WHICH 'I'HI~ HKL\HING ON 

6 THE MERITS IL~S CONCLUDED.-The Copyright Roy7 alty ,Judges sitting on the date of enaetment shall 

8 have authority to decide any pending proceeding in 

9 which the hearing on the merits has concluded, 

10 under the standards~ procedures, and regulations in 

11 effect prior to the enactment of this Aet. This au12 thority shall include the authority to decide any moB tiOll for rehearing Ulider section 803(c)(2) of title 

14 17, United States Code, in any such proceeding. 

15 PROCEEDINGS IN WHICH THE HEARING ON 

16 THE MERITS IL~S CO:.VIl\TENCED BUT NOT CON17 CLUDED.-The Copyright Royalty .T udges sittillg on 

18 the date of enactment sllall llave autllority to decide 

19 any pending proceeding in which the hearing on the 

20 merits has commenced but not concluded, under the 

21 standards, procedures, and reg1uations in effect 

22 prior to the enaetment of this Act, except that this 

23 authority may only be exercised with the consent of 

24 all participants in any proceeding to determine 

25 terms and rates of royalty payments under section 

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112 or 114 of title 17, Ullited States Code. 1'llis au2 thority shall include the authority to decide any mo3 tion for rehearing under sectioll of title 

4 17, United States Code, in any such proceeding. 

5 (3) AI,j, O'l'Hlm I'I~NDlNG I'HOCElmINGS.-1'he 

6 CopYTight Royalty Judges appointed pursuant to 

7 section 2 shaH assume authority over any pending 

8 proceeding in which the hearing on the merits has 

9 not conullenced. The Copyright Royalty Judges shall 

10 recommence any pending proceeding to determine 

11 terms and rates of royalty pa:yments under section 

12 112 or 114 of title 17 , United States Code, under 

13 the procedures, standards and regulations set forth 

14 in this Act, and the requirement set forth in section 

15 803(c)(I) of title 17, United States Code, that the 

16 11roceeding he cone-luded no later than 15 days he17 fore the expiration of the then current statutory 

18 rates and terms, shall not apply. The Copyright 

19 Royalty Judges shall set a reasonable schedule for 

20 the continuation of allY pelldillg proceeding other 

21 than a proceeding to determine the terms and rates 

22 of royalty payments under section 112 or 114 of 

23 title 17, United States Code . 

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Mr. GOODLATTE. And now it’s my pleasure to recognize the Ranking Member of the Subcommittee, the gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. And thank you for a very 

outstanding opening statement. And I understand Mr. Berman is 

in the back waiting to make a grand entrance, so we will chide him 

later. I also want to thank the Chairman on his, what I understand 

to be his imminent ascension to the chairmanship of the full Judiciary Committee. And he’s outlined a robust agenda in this opening 

statement just in the music area. So I’ll be looking forward to 

working with him. And I want to thank him for scheduling this 

first in a series of anticipated hearings on music licensing. 

Music is, of course, ubiquitous. It’s everywhere. The proliferation 

of reality talent shows like American Idol, X Factor, The Voice, 

America’s Got Talent, all evidence of our affection and affinity for 

music. IPods and iPads and other portable devices further illustrate our near, insatiable appetite for music. It’s impossible for me 

to imagine a day where we don’t encounter music. Despite our love 

of music and our admiration for artists, including the singers, songwriters and musicians whose creative talents provide us a wide diversity of entertainment, the complex licensing scheme for the delivery of music like stability and parity across platforms. 

Over the past 15 years, Congress has been called upon to intervene following each rate-setting proceeding before the copyright 

judges. We’ve created a compulsory license, established new standards for new technologies and retooled the structural framework for 

the setting of rates all in response to complaints that industry participants could not reach agreements or that the rates set by the 

authorizing body were too high or too low. This is not a healthy 

process for artists, delivery platforms or consumers and it’s not a 

healthy process for Congress. 

Although today’s hearing focuses on the Internet Radio Fairness 

Act, that focus is itself probably very shortsighted. Many of the 

supporters of H.R. 6480 highlight the longstanding inequity associated with the disparate standards governing the rate-setting process for the delivery of music by digital transmission. Specifically, 

they argue that while preexisting cable and satellite services pay 

lower rates determined under the 501(b) standard, newer and increasingly popular Internet music providers pay substantially higher rates determined under the willing buyer/willing seller standard. 

But an even longer standing inequity exists in the U.S. copyright 

law in that U.S. copyright law fails to recognize a performance 

right for vocalists and musicians when their work is played over 

terrestrial AM and FM radio. 

Today when you turn on your favorite AM or FM radio station, 

the artists who perform that music, vocalists and members of the 

band don’t get paid a dime. But when you listen to the same song 

on Internet, cable or satellite radio, the artists are compensated for 

their work. The differences don’t stop there. The composer or songwriter is paid for the performance of their work across all platforms 

while sound recording artists are only paid when their work is delivered by digital means. And both the songwriter and the recording artists, when they are paid, are paid at different rates depending upon the method of delivery. 
39 

The reasons for these disparities in treatment are largely historical, but also rooted in legitimate concerns surrounding the threat 

that high quality media poses to record sales and other forms of 

revenue for artists. This concern, however, may no longer justify 

the exemption enjoyed by broadcast radio, and I think it is incumbent on us to address that disparity if we are to bring any sense 

of rationality to this area of our economy. That’s about 90 percent 

of the problem. Yet H.R. 6480 fails to address it at all and, at best, 

nibbles around the edges of the challenge. 

I believe that we all realize that in some sense digital transmission of music over the Internet has given birth to an even wider 

degree of exposure and promotional value for musical performers 

and genres that might otherwise receive little or no airplay. In 

short, Internet radio has expanded choices for consumers and provided alternate means for independent artists to showcase their 

talents. But I believe that a fair licensing regime must, first and 

foremost, adequately compensate the artist who create and perform 

the musical content upon which all delivery platforms are based. 

We must get beyond the point where the shelf life of our legislative solutions in this vital industry is only as long as the next ratesetting proceeding. A comprehensive examination of music licensing requires that we examine the existing standards and rationales 

underlying our copyright system with the goal of establishing a 

long-term competitive environment with competitive rates for artists under a license which, after all, is a compulsory license. 

Mr. Chairman, there are several other components of the Internet Radio Fairness Act, including the method of selecting judges, 

expansion of discovery, modification of evidentiary standards, antitrust provisions and the establishment of a global database that I 

have not addressed here, but that also cause me varying degrees 

of concern. 

We have a distinguished panel of industry experts who no doubt 

have very passionate views on all those issues in addition to the 

rate standard. I look forward to their testimony. Before I yield 

back, Mr. Chairman, I do want to acknowledge a true champion of 

the rights of creative arts and a pioneer on performance rights, 

Howard Berman. 

Mr. Berman has jealously guarded intellectual property rights 

throughout his distinguished career and has been a valuable resource to me personally and to this Committee. I want to express 

my gratitude for the work he has done on behalf of the content 

community, as well as all other players in the IP area and wish 

him well. I know that he will continue to serve the public interest 

in some important next endeavor. And with that, Mr. Chairman, I 

yield back and thank the Chairman. [Applause.] 

Mr. GOODLATTE. The gentleman from North Carolina’s timing is 

better than mine. 

Mr. WATT. I knew he was waiting on his grand entrance. 

Mr. GOODLATTE. We do thank the gentleman from California for 

his long and very capable service on this Subcommittee and the full 

Committee, and we will miss you, Howard. 

Mr. COBLE. Mr. Chairman. 

Mr. GOODLATTE. For what purpose does that the gentleman from 

North Carolina wish to be recognized? 
40 

Mr. COBLE. May I speak out of order for 1 minute? 

Mr. GOODLATTE. The gentleman is recognized without objection. 

Mr. COBLE. I think I would be remiss if I did not echo what has 

been said about the distinguished gentleman from California. He 

served as my Ranking Member, I served as his Ranking Member 

on this Subcommittee. And Howard, as has been said earlier, you 

will indeed be sorely missed. Thank you, Mr. Chairman. I appreciate that. 

Mr. GOODLATTE. I thank the gentleman. And now it’s my opportunity to recognize the Chairman of the full Committee, who I 

want to also congratulate for the recommendation of the House Republican Steering Committee that he Chairs, the Science, Space 

and Technology Committee, in the new Congress, and to thank him 

for his outstanding work as the Chairman of the Judiciary Committee. 

Mr. SMITH. Thank you for that, Mr. Chairman. I am very delighted that you will be succeeding me. And the Committee will be 

in good hands, and look forward to continue to work with you 

there. Also, it was appropriate that we applaud Howard Berman a 

minute ago for his many contributions to this Committee. And 

Howard, you should know that’s actually the second round of applause you have gotten today because the Chairman, Bob Goodlatte, recognized you before you came into the room. And so even 

the second round of applause was well deserved as well. 

Mr. GOODLATTE. He doesn’t represent the entertainment industry 

for nothing. He understands how this works. 

Mr. SMITH. Again, thank you, Mr. Chairman, for calling this 

hearing on issues affecting music licensing. This is a topic that we 

have debated for many years and deserves this Committee’s attention in light of changes that have occurred in the music industry. 

Twenty years ago when you wanted to listen to a song, you either 

purchased it on a CD or you tuned your radio to your favorite station and hoped that they would play it. Today, you can simply type 

Pandora in your browser and select an entire online radio station 

that plays your favorite artists’ sound recordings. 

The relationship among artists, consumers, composers and publishers is a delicate one. The Constitution affords Congress the exclusive right to make copyright law that protects creators while simultaneously ensuring that artists and composers are compensated. This Committee has continually addressed the issues 

that surround music licensing and royalty structures. This includes 

the section 115 Reform Act, the Performance Right Act, the enactment of three webcasting bills, and the passage of the Copyright 

Royalty and Distribution Reform Act. 

Today we continue our ongoing examination of this compensation 

scheme. This hearing will explore the state of the law as it affects 

music creators, consumers and users of musical works and sound 

recordings. Government dictated compulsory licenses deprive creators of their ability to negotiate for the use of their works. Rather 

than increasing our reliance on these compulsory licenses, we 

should consider moving in the direction of free market discussions 

and negotiated resolutions. 

The expansion and strengthening of stringent compulsory licensing terms undermines the ability to develop healthy markets. It 
41 

leads to below market compensation for creators and invites constant petitions for government to place its thumb on the economic 

scale, commandeering the force of government to choose winners 

and losers. 

I do not believe the copyright law is perfect and should remain 

unchanged. Any change, however, should reflect a balanced approach with input from creators, presenters and listeners of music. 

It is my hope that this hearing will begin a process that will carry 

into the next Congress. And I look forward to more opportunities 

to examine the laws and policies that underlie our music licensing 

system and our compulsory licensing regime. Balance, fairness and 

equality requires to move with deliberation. Justice and prudence 

require that our process be one that is inclusive of all legitimate 

interest and perspectives if all results are to achieve lasting and 

meaningful reforms. Thank you, Mr. Chairman. I yield back. 

Mr. GOODLATTE. I thank the Chairman. And it’s now my pleasure to recognize the Ranking Member of the full Committee, the 

gentleman from Michigan, Mr. Conyers. 

Mr. CONYERS. Thank you, Mr. Chairman. And to all of those who 

are being celebrated for leaving, for serving and for their continued 

interest, of course, Mr. Berman. And I want to include the former 

Chairman, Mr. Smith, who I worked with for more years than I 

thought was appropriate. But we’ve had a great time, and this 

Committee is very important to me. I’m going to just edit my own 

remarks and put the rest in the record, but might I be the first to 

suggest the misleading title of this measure, the Internet Radio 

Fairness Act. A more appropriate title might be the Paycheck Reduction Act, because what we’re doing here is lowering the royalties that Internet webcasters would pay to artists by more than 85 

percent. 

This isn’t the first time I’ve persuaded the Committee to redraft 

the title. I remember the Frederick Douglass and Susan B. Anthony Prenatal Nondiscriminatory Act also. We had to do a little 

work on that as well. 

Now, what’s the basic issue that brings us here today? Well, it’s 

the fairness issue in terms of people being rewarded for their skill 

and talent, musicians and singers across all musical genres. I’ve 

tried to figure out a way to get Miles Davis and John Coltrane into 

this discussion without success. But this is their only compensation. They depend on royalties. And their careers aren’t always 

that long either. As a matter of fact, some never have that big hit 

that separates them. 

And so here we have the leading supporter of this bill, a publicly 

traded company valued at $1.4 billion at the end of last month, essentially urging that we consider a measure that would cut royalties and deprive artists of the fair market value of their work. Not 

surprisingly, this explains why artists who don’t often join in expressing public opposition to political matters, some 125 have 

signed on in opposition to H.R. 6480. As a matter of fact, today, 

and I’ll ask unanimous consent to put in the record the letter that 

also adds opposition to the measure from the Center for Individual 

Freedom, the Harbour League, the Hispanic Leadership Fund, the 

Institute for Liberty, the Institute for Politic Policy Innovation and 

the Tea Party Nation. 
42 

All of these quite diverse, as you can detect, are expressing 

strong reservations about the measure that is being examined here 

this afternoon. It can’t be disputed that now we understand Internet radio to be the future and that the Internet has dramatically 

changed the way music is produced, marketed and distributed. In 

particular, Internet radio has become a major source of music for 

many listeners. Even Apple and Clear Channel, and XM/Sirius 

have all moved into the Internet radio space. 

And I know that there are broadcasters, medium-sized and 

small, that have some resistance to the idea of performance rights. 

But I want to make a prediction today. This bill may well be the 

catalyst to advancing and to formulating an AM-FM performance 

right. That’s what people are beginning to think about, because 

outside of the experts here, most people assume that people listening to a song or a performance on the radio, that they were getting 

some kind of compensation all the time. And now it’s becoming 

clear that when former Chairman Conyers starts working with 

Grover Norquist, the American Conservative Union, the Citizens 

Against Government Waste and the Taxpayer’s Protective Alliance, 

there’s something going on. 

Now, on our side we have the American Federation of Labor, 

AFL-CIO, we have the NAACP, the Screen Actors Guild, the American Federation of Television and Radio Artists, the American Association of Independent Music. And so I want all of us to remember that it was in 1998 with Henry Hyde that we introduced the 

Digital Millennium Copyright Act. It was signed into law by President Clinton, and it granted Internet radio services permission to 

take advantage of the compulsory license, but established that a 

market oriented by a willing buyer/willing seller rate would be put 

forth. 

So that’s what this is all about. It’s been expanded. We’ve had 

the Digital Performance Right in Sound Recordings Act of 1995, 

and we have moved along in a very fair way. 

So I just wanted to conclude by thanking and congratulating you, 

Chairman Goodlatte. We have a very important and increasing role 

in the Judiciary Committee with reference to intellectual property. 

And I think this is an excellent way to start that examination. I 

thank you very much. 

Mr. GOODLATTE. I thank Chairman Conyers. And the Chair 

would advise Members of the Committee and our panel and our 

guests here today that because the Republican Conference will convene at 2 p.m. For very important business, we do want to announce that we must conclude this hearing by 2 p.m. So we will 

proceed expeditiously. But we first want to recognize two more 

Members, the gentleman from Utah to say a word about his legislation for 1 minute, and then the gentleman from California, Mr. 

Berman, for 1 minute. And then all other Members’ opening statements will be made a part of the record. 

So the Chair now recognizes the gentleman from Utah, Mr. 

Chaffetz, for 1 minute. 

Mr. CHAFFETZ. Thank you, Chairman Goodlatte. I appreciate 

your holding this hearing. And today, due to advances in technology, innovation and risk-taking companies consumers are able 

to listen to the radio on numerous different devices delivered 
43 

through a wide variety of digital services. Internet radio should be 

a boon to the entire audio market, from creators to distributors 

and, of course, to consumers, but instead it’s barely hanging on. 

MTV, Microsoft, Rolling Stone, AOL, Yahoo, all tried to get in the 

space, all had to exit because it doesn’t work financially. 

All forms of digital radio, whether satellite, cable or Internet 

should compete against each other on a level playing field. Unfortunately, that’s not the case. The Internet Radio Fairness Act legislation levels the playing field for Internet radio services by putting 

them under the same market base standard used to establish rates 

for other digital services, including cable and satellite radio. Congress enacted the royalty rate standard for Internet radio 14 years 

ago when Internet radio was barely a concept and long before today’s prominent Internet radio companies even existed. 

It’s well past time to correct the mistakes with the new understanding we have today of how the world works and stop discriminating against Internet radio. 

Mr. Chairman, I ask unanimous consent to insert in the record 

three letters, one from the Internet Radio Fairness Coalition, the 

Digital Media Association and an independent artist, Patrick Laird, 

into the record. 

Mr. GOODLATTE. Without objection, so ordered. 

[The information referred to follows:] 
44 

Nowmber 27, 2012 

Th~ Honorabl~ Bob Goodlatt~ 

Chairman, Subcommittee on Intellectual Properl~, 

Competition and the Int~T""1 

Committe<! on tht!' Judida"l 

U,S. House of RepresentatiYn 

Room B·352 Rayburn HOB 

Washingto~, D.C. 20515 

The Honorable Melvin Watt 

Ran~ing Member, Subcommittee on Intellectual Property, 

Competition and the Internet 

Commitle~ on the Judidary 

U.S. Houseof Representatives 

Room 8·351 Rayburn HOB 

Washinston. D.C. 2051S 

DearChalrman Goodlatteand Ranking Member Watt, 

We, the members of the Internet Radio Fairness Coal~ion, are writing to ask you to support !oj.H. 6480, 

the Internet Radio Faimess Ad, introduceC by Reps. Jason Chaffetl (R-UT), Jared Polis (0-C01, Darrell 

)sla (R-CA), and ZI>!! lofgreT\ (O-CA). 

,his legislation will bring the royaltv licensing system for Internet radio jnl<) the 2)st century. 

H.H. 6480 help" create a susulnable Internet radio business model thai will benefit vour constituents: 

CONSUMERS: A sustainable Internet radio indunry will give coml/mers more choices and mare 

products for listeninB to the music they low:. 

MUSICIANS, A sustainable Internet radio industry will enable artists to earn rroore money as Internet 

radio Brows. 

ENTREPRENEURS: A sustainable business model will create a marketplace that will enable 

entreprMeur. lD inw:~t in new, inm:wative waV_ to deliver music to the public - and will create pbs 

in the process. 

The current royalty rate-sett ing system for dieltal radio, including Internet radkl, II the product of 

piecemeal legislation that wa~ enacted as new te<:hnologies wele developed_ The result is <t system that 

is \ignificimtly out of date - and. critically, out of sync with the realities of the 21 ~ century marketplace. 

The current ''('Item hobbles the growth and economic heaith of Internet radio, and limit! the financial 

rewards for 5ingers and sOTl8writers, re<:ord labels and the Internet radio indUstry, hen though Internet 

r~dio h~s been widely - and increasingly - embraced by consumers, the C1.I"ent rate-letting standard 
45 

for Internet radio ha, driV<!n many of the early innovators out of the business and many In no""tor~ ,md 

invenor, have rema;nl'd on tile sIdelines 

The Internet Radio Fairness Act calls for all digital music to be judged by tile Same rate-setting standard 

- 801(b) - bringing lntefnelladio under the same standard that's been uied successful ly for over]O 

years in most other Copyright Office proceedings. The aOl(b) standard is ~lan<:ed 10 e<1courase both 

Ihe «ealian and promotion of crealive worl:s and encourages the growth of fObunand sustainable 

markets for these worils. 

The bill doesn·t setor change foyally rales for Inlernet .adio. II simply encouraSes the Copyright Royalty 

Board (CRB) to have accus to, and take into account, mote relevant Information when they make their 

deciSions about royaltv rates- e.g .. ma~imilin& the availability of creative works to Ihe publlt and 

generating a fair return lor copyright owners and i lai. income fm copyfight use.s. 

An updated royalty rate stand'lfd for Internet radio will c.eille eflOrmous benefits for artists, provldlnll 

them with more ways for their musk to be played and new and noting way. to connect Wilh thel. 

audiellces, creating new r""enue. streams and further monetizing theltwork (seiling CDs. MP3s, 

promoting their tours, selling merchandise, and more). 

Passage of the IRfA will mean mor .. jobs in a ! u<1ainablelno;luSlrv, more <:hokes Inr li" .. ne". and mOle 

opportunities ~nd revenue for wooing artists and their 'l'CO.d labels. When t~e digital music sector Is 

allowed 10 grow and innOYale, everybody wins. 

For the benefit of the consumers, mu;lclans, and entrepreneurs in your district, we urge you to support 

Ihe Internet Radio Fairness Act. Thank you. 

Sincerely, 

Members of the Imernet Radio fairness CoalOt.ion 

917Music 

AuuRadio 

Clear Chrmflf'/ Media and fnt .. "alnment 

Compute'and Communications IndllStry 

Assadali(}tl (CC/A) 

Crmsum .. r Electronics A5$ocjatfon (CEA) 

Digilal Media Association IDiMA) 

Dillilal5au~d & Video 

Digitolf~ !mported 

fnlline Advococy 

HD103.cam 

Musefa Rod/o 

cc: Members of tile !-lous .. Judiciary Committee 

Mark Ral7l5e~ Media 

Narianal Reli~ious 8focdcasler'i Music ticens" 

Committe" {NRBtMCJ 

Pandora 

Pearadio 

Radio porodis!!: 

5alem Communicotions 

5enrorl 

5mo/f webcosters Allionce 

Trlron Digital 

Trutocol Medio 
46 

wv.w.digmedia.org 

Honontble Bob Goodlaue 

Cltairman of the Subcommittee 011 

Intellectual Prop~ny , Competition, nnd 

Ihe imemct 

US. House Comminee on the Judiciary 

2240 Rayburn HOB 

Washington, DC20515 

November 28. 2012 

Honorable Mel Wall 

Rall!;;ing l-kmbcr of tile Subcommittee on 

intellectual Propeny, Competition, and 

the Imemet 

US. House Comminee on the Judi ciary 

23 ~ Ra yburn HOB 

Washillg10ll, DC 205]5 

DearChainnan Goodla tte 8nd Ranking Member Waif. 

As the leading lIatiOllaltrade association dedicated 10 representing the interesls of 

lesitimate online distributors of digiml music, movies and books, the Disital Media Association 

("DiM A") writes to express its suppon for H.R 6480, the " lnternet Radio Fajmes~ Act of2012," 

Introduced just a few months ago, H.R 6480 seeks to eliminate a longstanding inequity 

found in the rate-5t'lting proce5s associated with the public pt'rfonnance ofwund recordings by 

Internet radio stlVice providers, Under cUm'!ntlaw. performance royalties for Internet radio are 

estahli1.lled under the "willing buyer·wining seller" standard I: while ra tes for cahle and satellite 

are determined under Ihe more widely uscd "801(b)" Slandard1

, This differcncc in treallnellt 

makes il vinun!ly impossible for Int .. ntel radio service pml'iders 10 cffe<:tivcly compete IIgain,l 

their two leading rivals in the digital music induslry. 

Fonunately. l-tR. 6480 proposes ttl elimillHte the existing imbalance in federal law by 

t:.'<:lend ing the same sct ofrule~ that currently apply 10 cable and i>/Itcllitc rndio 10 covcr [memet 

Sl'<:\)OIl I t~(f)(2}\6) oft;tI~ t 7 USc. (" In cstabll,h,ng <ilt~s and lenn~ for !l;UlsnIlSS;OIlS by eligible 

non subscription 5\:rvICCS lind ne" subscnption seTl'lces, !he U:>pynghl Royalty Jlldgcs shall cMabl i~h rnt~5 

and lenns th1ll most dearly nlpnlscnl the rntcs and rl1l~ thai "ould how bo:en nl'goti:ttcd in the 

lllaIkctplocc bo:twc.:n a ",i/linK hu,l'u ",,,I ~ ",il/j"N ,'elll!l') (cmph.\Sis added) 

5«11011 114(1)( I)(B) oflllk 17 USC. ('In cst.lhltshing r:"c~ alld tcnn~ fOf p=xlslmg slibscriplioo 

scn ,C\:s 3IId prcc:>:;slillg saleillte dig,ulll.udio rad,O scrvlccs, ln ulldi/i"n /0 ,"e ubjecti"e~ Mf/unh i" 

,'tctlon 8111(b)(I). Ihe Copy nghl Royalt)' Judges ",a~ ' ronsidcr .. " (~mphasis added) 
47 

Letter to Hon. Goodlatte and Hon. Watt November 28. 2U12. 

radio. By placing Internet radio under the same rate-setting standard afforded to cable and 

satellite radio, Congress will have not only taken a significant step towards creating a level 

playing field with regard to the licensing of sound recordings; it also will have promoted greater 

harmony with respect to the manner by which musical compositions are licensed under section 

115 of the Copyright Act. 

Some have recently endorsed the idea of harmonizing the rate-setting process under 

sections 114 and 115 of the Copyright Act, but suggested that any newly imposed standard 

should mirror the market-based approach embodied in the "willing buyer-willing seller" 

standard. This suggestion flouts the experience that web casters - the only licensee currently 

operating under the "willing buyer-willing seller" standard - have had over course of the past 

few years. 

The rate-setting proceedings that have ensued since enactment of the "willing buyerwilling seller' standard can be characterized as nothing short of a dismal failure. The first ratesetting proceeding resulted in the disbandment of the Copyright Arbitration Royalty Panel and 

the adoption of the Copyright Royalty Board which still operates today. The second rate-setting 

proceeding, in comparison, engendered such large and widespread protests by religious, 

educational and commercial web casters over unsustainable royalties that Congress ultimately 

decided to pass the "Webcaster Settlement Act of200S" and the "Web caster Settlement Act of 

2009" as a way providing temporary relief 

The aforementioned experiences stand in stark contrast to those oflicensees operating 

under the "SOI(b)" standard. Since the latter part of the 1970's, record labels have relied on the 

"SOl(b)" standard to license musical compositions and not once has Congress had to intervene to 

provide relief from exorbitant rates. Similarly, satellite and cable radio have operated under the 

"SOl(b)" for nearly two decades now with no need for congressional intervention. The 

ditference lies solely in the standard and the fact that under this unique standard, Internet radio 

service providers are currently being treated unfairly. 

H.R. 64S0 eliminates this inequity by proposing a series of limited, yet important, 

improvements to the section 114 rate-setting standard as well as its accompanying procedures. 

These changes are narrow in scope; and as such, we would respectfully urge you to support this 

thoughtful piece of legislation. 

If you have any questions regarding this correspondence or need any additional 

information, please do not hesitate to contact me at (202) 639-9502. 

Sincerely, 

/s/ Gregory Alan Barnes 

General Counsel, DiMA 

cc: Members of the Subcommittee on Intellectual Property, Competition, and the Internet 
48 

BREAK OF REALITY 

November 26, 2012 

Dear Chairman Goodlatte and Representative Watt, 

As a musician with Break of Reality, an independent music group, I would very 

much like to have my voice heard with regard to the Internet Radio Fairness Act. 

Internet radio has provided tremendous exposure for my band. I would like to 

share how important it is to help create fair legislation so that companies like 

Pandora can flourish and expand, creating more opportunities and revenue for us 

as musicians. 

Break of Reality has been performing for almost a decade now, and next to 

performing live, internet radio has proved to be the greatest asset to the growth 

of our group. Our exposure on Pandora and Spotify has led directly to a huge 

increase in music sales through digital music stores such as iTunes and 

Amazon.com, and has created great performance opportunities by exposing our 

music to concert presenters around the country who hire us to perform. . 

Furthermore, these concerts are being filled largely by fans who find our music 

exclusively through companies like Pandora. 

To be more precise, in the first twelve months of being included in Pandora's 

music library, our digital album sales increased by 290% from the year prior. In 

the subsequent 12 months, sales rose 406% from our pre-Pandora days. The day 

before submitting this letter, Break of Reality asked its Facebook fans, in an 

objective manner, how they discovered our music for the first time. With an 

overwhelming response from our fans, the results were staggering: 44% of fans 

polled discovered our music through internet radio, 31% through live 

performance, 15% from a friend, and 9% through Youtube and other internet 

outlets. It is clear that the effectiveness of internet radio with regard to both 

product sales and promotional power is overwhelming, and the success and 

expansion of these companies are of the utmost importance for the future of our 
49 

Mr. GOODLATTE. And the Chair would observe that he doubts 

that this will be Howard Berman’s last words. But today the gentleman from California gets the last word on these opening statements and is recognized. 

Mr. BERMAN. Well, thank you very much, Mr. Chairman. And I 

thank all my colleagues for their very kind words. It’s really been 

a great honor to serve on this Committee for 30 years now. I was 

reminded of when John Conyers was Chairman of the Criminal 

Justice Subcommittee trying to reform the RICO laws. That was 

awhile ago. But just—I don’t have an opening statement on the 

subject, I have some points I’ll make later on—but just generally, 

I think at the end of the day this isn’t about content versus technology. Musicians and artists need to get adequately compensated 
50 

to continue to create and share their art and the services need to 

thrive in order to ensure that the music continues to be heard. 

And I think there’s really more of a symbiotic relationship here. 

We have to just find that sweet spot that maximizes the ability of 

musicians and composers and songwriters to make the music and 

the songs and the technologies to thrive and to play that music for 

the benefit in the end of not just the people of this country, but of 

the world. Thank you very much. 

Mr. GOODLATTE. I thank the gentleman. We have a very distinguished panel of witnesses today. Their written statements will be 

entered into the record in their entirety. And I ask that the witnesses summarize their testimony in 5 minutes or less. To help you 

stay within that time, there is a timing light on your table. When 

the light switches from green to yellow, you will have 1 minute to 

conclude your testimony. When the light turns red, it signals the 

witness’ 5 minutes have expired. And before I introduce the witnesses, as is the custom of the Committee, I would ask that they 

rise and be sworn in. 

Do you and each of you swear that the testimony you are about 

to give will be the truth, the whole truth and nothing but the 

truth, so help you God? Thank you. And please be seated. 

We appreciate the personal efforts that each of you have made 

to arrange your schedules to accommodate our request that you appear and testify before the Subcommittee on this important subject. 

Our first witness is Joseph J. Kennedy, the Chief Executive Officer 

and President of Pandora. Pandora is the Nation’s leading Internet 

radio service. Since launching its app and its mobile service in 

2008, Pandora has been recognized by both consumers and industry experts as the premier application on the iPhone and other mobile devices. A public company since 2011, Pandora has a market 

capitalization in the neighborhood of $1.3 billion, has more than 

150 million registered users and serves more than 55 million individual consumers each month. 

Mr. Kennedy joined Pandora in 2004 immediately following previous positions as a Senior Executive with E-Loan and Saturn Corporation. He earned his MBA from Harvard Business School and 

possesses a Bachelor of Science in Engineering and Computer 

Science from Princeton University. 

Our second witness is Bruce Reese who appears today on behalf 

of the National Association of Broadcasters. Mr. Reese is President 

and Chief Executive Officer of Hubbard Radio, LLC. Hubbard operates 21 radio stations in five major media markets in the U.S., all 

of which stream their broadcasts over the Internet. Mr. Reese has 

spent nearly three decades in radio. Prior to becoming CEO of Hubbard in 2011, he served as president and CEO, Executive Vice 

President and General Counsel at various times at Bonneville 

International Corporation. 

Mr. Reese began his legal career with the U.S. Department of 

Justice’s antitrust division. He earned his Bachelor of Arts degree 

and his J.D. from Brigham Young University. 

Our third witness is David Pakman. Mr. Pakman is a partner in 

Venrock, a venture capital firm he joined in 2008 that has offices 

in Palo Alto, New York, Cambridge and Israel. An Internet entrepreneur, Mr. Pakman previously served as the Chief Executive Of-
51 

ficer of eMusic, a leading digital retailer of independent music that 

is second only to iTunes in the number of downloads sold. Mr. 

Pakman is credited with being a co-creator of Apple Computer’s 

music group. Mr. Pakman earned his degree in Computer Science 

Engineering from the University of Pennsylvania’s School of Engineering and Applied Sciences. 

Our fourth witness is an accomplished record producer, songwriter, recording artist and the chairman emeritus of the National 

Academy of Recording Arts and Sciences, Mr. Jimmy Jam. A fivetime Grammy award winner, Jimmy and his business and creative 

partner Terry Lewis have worked together for more than 30 years. 

They’ve written and/or produced more than 100 albums and singles 

that have achieved gold, platinum, multi-platinum or diamond status. Their collaboration has resulted in at least 26 number one 

R&B hits and 16 number one pop hits which gives the pair more 

billboard number one hits than any duo in chart history. Raised in 

Minneapolis, Jimmy and his family now live in Hidden Hills, California. 

Our fifth witness is Dr. Jeffrey Eisenach. Dr. Eisenach is a professional economist who served in senior positions at the Federal 

Trade Commission and the Office of Management and Budget during the administration of President Reagan. A visiting scholar at 

the American Enterprise Institute, Dr. Eisenach focuses on policies 

that affect the information technology sector, innovation and entrepreneurship. He is a Managing Director and Principal at Navigant 

Economics and an adjunct professor at the George Mason University School of Law where he teaches regulated industries. Dr. 

Eisenach has been published on a wide range of issues, including 

industrial organization, communications policy and the Internet 

government regulations, labor economics and public finance. 

He has also taught at Harvard University’s Kennedy School of 

Government and at Virginia Tech. A member of the board of advisors of the Pew Project on the Internet and American Life for more 

than a decade and the former president of the Progress and Freedom Foundation, Dr. Eisenach received his Ph.D. in Economics 

from the University of Virginia and his Bachelor of Arts in Economics from Claremont McKenna College. 

Michael J. Huppe is our final witness. Since 2011 Mr. Huppe has 

served as the President of SoundExchange, the nonprofit organization that collects digital music royalties paid by Internet radio, satellite radio and other digital media services on behalf of recording 

artists and record labels. Prior to being appointed to serve as President, Mr. Huppe served as the organization’s Executive Vice President and General Counsel. Mr. Huppe earned his J.D. from Harvard Law School and his Bachelor of Arts from the University of 

Virginia. In addition to his duties at SoundExchange, Mr. Huppe 

also serves as an adjunct professor at the Georgetown University 

Law Center. 

Welcome to you all. And we will begin with Mr. Kennedy. And 

Mr. Kennedy I will tell you that I am one of those 150 million Pandora users who enjoys your service, and welcome. 
52 

TESTIMONY OF JOSEPH J. KENNEDY, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, PANDORA MEDIA, INC. 

Mr. KENNEDY. Thank you, sir. Chairman Goodlatte, Ranking 

Member Watt, Members of the Subcommittee—— 

Mr. GOODLATTE. Mr. Kennedy, you may want to push the button 

on your microphone so we can all hear you. 

Mr. KENNEDY. Forgive me. Chairman Goodlatte, Ranking Member Watt, Members of the Subcommittee, I am Joe Kennedy, the 

CEO of Pandora, America’s largest Internet radio service, which 

more than 60 million Americans have listened to in just the last 

30 days. America’s embrace of Pandora reflects the potential of 

Internet radio. We play all of the great music created and enjoyed 

by Americans, not just the most popular genres and hits, but bluegrass, big band, gospel, New Orleans jazz, et cetera, over 400 

genres and subgenres. It is the most inclusive form of radio playing 

the music of over 100,000 different artists every month. 

I’m here to ask you to support the Internet Radio Fairness Act 

sponsored by your Judiciary Committee colleagues, Representative 

Chaffetz, Polis, Issa and Lofgren. This important legislation will 

address two extraordinary inequities in the Copyright Act. First, 

the unfair rate-setting standard that applies only to Internet radio, 

not to cable radio or satellite radio or to record companies when 

they obtain licenses from musical works and songwriters; and second, an unfair process that deviates in many important ways from 

how our Federal Court system works, one that actually prevents 

royalty judges from reviewing all relevant evidence when determining Internet radio rates. The source of these inequities is 

massed by complex legalese, but the consequence is simple. In 2012 

Pandora will account for only 7 percent of U.S. radio listening, yet 

we will pay SoundExchange almost a quarter of a billion dollars, 

more than 50 percent of revenue. By contrast, satellite radio will 

pay 71⁄2 percent and cable radio 15 percent. Pandora pays more in 

absolute dollars than any other company, including SiriusXM, a 

company with eight times our revenue. 

In fact, Pandora pays more sound recording performance royalties than all of the radio industries in the UK, France, Canada and 

Australia combined. And although Pandora’s payments are extraordinarily high they would have been even higher had Congress not 

intervened to undo the Copyright Royalty Board’s disastrous 2007 

decision, so high, in fact, that they would have forced Pandora to 

shut down. In 14 months, the CRB will begin another rate setting. 

To avoid yet another congressional intervention, we urge your support of the Internet Radio Fairness Act to ensure an outcome that 

is fair to all parties. 

How is it possible that Internet radio rates can be so unfair by 

any U.S. or global standard? The answer is twofold. First, the socalled willing buyer/willing-seller rate standard which applies only 

to Internet radio has not proven effective in practice. It forces the 

judges to set a rate based solely on marketplace benchmarks, yet 

there is no market for radio rates. Not only is there no market for 

these rates, but since this is also the Subcommittee on Competition, you may be interested to hear that there is also evidence that 

the recording industry has actively sought to prevent any such 
53 

market from developing. This is a highly concentrated industry 

with an HHI of over 2,500. 

SoundExchange is today defending itself in Federal Court 

against charges that it conspired to impede SiriusXM’s effort to develop a market for radio rates. In contrast, the rate-setting standard for cable and satellite radio and for record companies when 

they obtain licenses for musical works from songwriters, utilizes a 

widely accepted fairness test that directs the judges to assure fairness to all sides. The recording industry simply cannot defend that 

the standard it has embraced for over 30 years for use when it is 

the one obtaining rights is not the right standard when the roles 

are reversed and it is the licensor, not the licensee. 

The second inequity violates a most basic American principle of 

fairness. The CRB proceedings as structured under current law actually permit the recording industry to cherry-pick the agreements 

entered into evidence in order to keep Internet radio rates artificially high. This is just one example of how the CRB process is unfair and what the Internet Radio Fairness Act will fix. 

In summary, Internet radio is enjoyed by over 100 million Americans, and we embrace that this new form of radio compensates performing artists. Absent the repeated congressional interventions 

detailed on the screen, today’s Internet radio would not exist. The 

law which produced such disastrous results will be relied upon 

again in a rate-setting process that begins in just 14 months. The 

time to fix that law is now. It will benefit artists, innovators and 

the millions of Americans who cherish Internet radio. Thank you. 

Mr. GOODLATTE. Thank you, Mr. Kennedy. 

[The prepared statement of Mr. Kennedy follows:] 
54 

Statement of 

Joe Kennedy 

Chief Executive Officer 

Pandora 

before the 

Subcommittee on Intellectual Property, Competition and the Internet 

Committee on the Judiciary 

U.S. House of Representatives 

"Music Licensing Part One: Legislation in the 112th Congress" 

November 28, 2012 

Chairman Goodlatte, Ranking Member Watt, Members of the Subcommittee, 

I am Joe Kennedy, the CEO of Pandora, America's largest Internet radio service, which more than 60 

million Americans have listened to in just the last 30 days. Pandora is headquartered in an enterprise 

zone in Oakland, CA, where it has created over 400 new jobs in the last five years. 

Pandora's Popularity Reflects the Potential of Internet Radio 

Americans' embrace of Pandora reflects the potential of Internet radio. We play ALL of the great music 

created and enjoyed by Americans -- not just the hits in the most popular genres but Blues, Classical, 

Christian, Bluegrass, Big Band, Classic Country, Baroque, Klezmer, a Cappella, New Orleans jazz, Zydeco, 

etc.-over 400 genres and sub-genres. 

It is the most democratic and inclusive form of radio, playing the music of over 100,000 different artists 

(70% of them independent), represented by a catalogue of over a million songs. And over 95% of these 

songs play every month--over 950,000 unique songs play every month on Pandora. For most of these 

artists, Pandora is the only radio play they've ever enjoyed. It is conceivable that this new vehicle for 

connecting artists with people who enjoy their particular kind of music, if it continues to grow, may 

eventually lead to the emergence of a musician's middle class. 

Listeners can access Pandora the same way they listen to other forms of radio. Eight of the world's 

largest automakers now include Pandora in new models. We are embedded in over 650 consumer 

electronics devices that enable Pandora to be enjoyed throughout people's homes. We are the second 

most downloaded iPhone app. Pandora is even built into refrigerators. Long gone are the days when 

customers accessed Internet radio only through their PCs or laptops. In fact, over 75% of our listening 

now takes place off the computer. 

The Playing Field for Internet Radio Is Anything But Level 

While Pandora and other Internet radio services compete directly with all of the other forms of radio for 

listeners in every place you find music - the home, the car, the office, on the go - we are subject to an 

astonishingly high royalty burden that is unique to Internet radio. 
55 

There are enormous differences in how performing artists and labels are compensated by digital radio 

services. This lack of a level playing field is fundamentally unfair and indefensible. The inequity arises 

from the fact that Congress has made decisions about radio and copyright law in a piecemeal and 

isolated manner; as each new form of radio transmission was invented, new legislation was passed but 

only to address the new form. The effect has been to penalize innovation when setting the rules for 

music royalties. The current ratesetting structure is a clear case of discrimination against the Internet 

and innovative services. 

The Internet Radio Fairness Act Corrects Two Extraordinary Inequities in the Copyright Act 

I am here to ask you to support the Internet Radio Fairness Act, sponsored by your Judiciary Committee 

colleagues, Representatives Chaffetz, Pollis, Issa and Lofgren. This important legislation will address two 

extraordinary inequities in the Copyright Act: 

First, the unfair rate-setting standard that applies only to Internet radio - not to cable radio or satellite 

radio, or to record companies when they obtain licenses for musical works from songwriters; and, 

Second, an unfair process that deviates in many important ways from how our Federal court system 

works, one that actually prevents royalty judges from reviewing all relevant evidence when determining 

Internet radio rates. 

The source of these inequities is masked by complex legalese-but the consequence is simple and 

indisputable: 

In Z012 Pandora will account for only 7% of U.S. radio listening, yet we will pay Sound Exchange almost a 

quarter of a billion dollars-more than 50% of our revenue. By contrast, satellite radio will pay 7.5% of 

their revenue, and cable radio will pay 15% of their revenue. 

Pandora pays more in absolute dollars than any other company, including Sirius XM - a company with 

eight times our revenue. 

In fact, Pandora pays more sound recording performance royalties in absolute dollars than all of the 

AM/FM, satellite and Internet radio industries in the UK, France, Canada, and Australia - combined. 

For years the recording industry has pointed to the rest of the developed world as the model the U.S. 

should follow in terms of sound recording performance rights. How many times have you heard the 

head of the RIAA start a sentence on this topic with the following words "The U.S. is the only country in 

the developed world ..... "? Yet the rates paid today by Internet radio in the U.S. are astonishingly out of 

step with radio rates in every other country in the world. 

For example, in the U.K., where all forms of radio (including AM/FMj must pay sound recording 

performance royalties and which has a population one-fifth that of the U.S, the total amount of such 

royalties paid by all forms of radio last year was less than $100 million. 1 By comparison the 

1 PPL Annual Review 2011, http://issuu.com(p~]!I~ or20l1; Note that the figures in this report include 

television usage of sound recordings as well as radio usage. 

Z 
56 

approximately $250 million currently being paid by Pandora to serve 7% of u.s. radio listening is 

exorbitantly high. 

And although Pandora's payments are extraordinarily high, they would have been even higher if 

Congress had not intervened to undo the Copyright Royalty Board's disastrous 2007 decision. So high in 

fact, that they would have forced Pandora to shut down. 

This was not the first time that Congress intervened to save Internet radio from a disastrous royalty rate 

decision under the Willing Buyer-Willing Seller standard. Although Pandora had not yet launched our 

service, in 2002 Congress stepped in to pass a law to allow the parties to reject the rates set by the panel 

and enter into an economically sustainable settlement. Two major rate setting decisions and two 

congressional interventions to undo those decisions - clearly we are dealing with a broken system that 

needs to be fixed. 

How Did We Get Here? 

1995: Digital Performance Rights Act 

First time a sound recording performance right was recognized by us law 

1998: DMCA 

Two fledging web casters forced to accept the RIAA's proposed legislation and 

"willing buyer/willing seller", under threat of 'ephemeral copy' lawsuits 

2000-2002: Webcasting Hearing (CARP) 

Congressional intervention required: Small Webcaster Settlement Act of 2002 

2005-2007: Webcasting Hearing (eRB) 

Congressional intervention required: Web caster Settlement Acts of 2008 and 

2009 

2014·2015: Webcasting Hearing (eRB) 

Flawed standard and process could result in need for third Congressional 

intervention 

In 14 months the CRB will begin another rate-setting proceeding. To avoid the need for yet another 

Congressional intervention, we urge your support of the Internet Radio Fairness Act to ensure an 

outcome that is fair to all parties. 

How is it possible that Internet radio rates can be so unfair by any u.S. or global standard? The answer is 

twofold: 

The 'Willing Buyer-Willing Seller" Rate Standard Has Failed Repeatedly 

First, the "willing buyer-willing seller" rate standard - which applies only to Internet radio-has not 

proven effective in practice. It forces the judges to set a rate based solely on marketplace 

benchmarks, yet there is no market for radio rates. 

3 
57 

The current hearing to set rates for Satellite radio illustrates the absurdity of any standard that directs 

the judges to set rates based solely on marketplace benchmarks: Five years ago, Sound Exchange argued 

that a complicated set of adjustments appropriately discounted the rates paid by subscription ondemand services to make them applicable to radio. Now, five years later, the rates paid by subscription 

on-demand services have decreased by 20%--yet Sound Exchange is arguing that radio rates should 

nonetheless be increased. ' 

Common sense would say that if this other market were a good benchmark for radio then a decrease in 

rates in that market would yield a decrease in rates for radio. But that's not what SoundExchange is 

arguing-which really is just an admission that there is no market for radio rates and telling the CRB to 

set rates based on a non-existent market makes it very difficult for them to do their job well. 

Not only is there no market for these rates, there is also evidence that the recording industry has 

actively sought to prevent any such market from developing. 

SoundExchange is today defending itself in Federal court against charges that it conspired to impede 

Sirius XM's effort to directly license music. 

According to a recent CRB transcript, the content of emails among recording industry principals 

discussing Sirius XM's direct licensing initiative has been paraphrased by SiriusXM's counsel as follows: 

"We've got to stop it, it's bad .... lt will bring rates down. It will destroy the collective.,,3 

The 801(b)(1) Standard Has Proven to Be Fair Over 30+ Years of Use 

In contrast, the so-called "801(bY' rate-setting standard for cable and satellite radio, and for record 

companies when they obtain licenses for musical works from songwriters, utilizes a widely accepted 

fairness test that directs the judges to assure fairness to all sides. 

The rate standard set forth in the Copyright Act at 17 U.S.c. §801(b)(1) was first introduced in the 

Copyright Act of 1975 and has been used since that time to guide the setting of rates that music labels 

must pay to songwriters and publishers for the use of their musical works. 

This standard directs rate setting panels: 

(1) To make determinations concerning the adjustment of reasonable copyright royalty rates-[which] 

shall be calculated to achieve the following objectives: 

(A) To maximize the availability of creative works to the public; 

(B) To afford the copyright owner a fair return for his creative work and the copyright user a fair 

income under existing economic conditions; 

, U.S. Copyright Royalty Judges, Docket No.: 2011-1 CRB PSS/Satellite II, Determination of Rates and Terms 10-16-

2012 - Vol. XIX, p. 4865, line 14-p. 4866, line 11 

3 U.S. Copyright Royalty Judges, Docket No.: 2011-1 CRB PSS/Satellite II, Determination of Rates and Terms 10-16-

2012 - Vol. XIX, p. 4893, lines 11-16 

4 
58 

(C) To reflect the relative roles of the copyright owner and the copyright user in the product made 

available to the public with respect to relative creative contribution, technological contribution, capital 

investment, cost, risk, and contribution to the opening of new markets for creative expression and 

media for their communication; 

(D) To minimize any disruptive impact on the structure of the industries involved and on generally 

prevailing industry practices. 

This rate standard has had the support of the recording industry since its introduction. The recording 

industry simply cannot defend that as a licensee of compositions it should have the benefit of the 801(b) 

"fairness" standard (which sets its royalties at about 10% of revenue), but as a licensor to Internet radio 

it deserves a different standard, one that under the 2007 CRB, would have captured over 100% of 

Pandora's revenue if Congress had not intervened. 

When Congress passed the very first law granting sound recording right holders a performance right in 

the Digital Performance Right in Sound Recordings Act of 1995, the standard selected was the 801(b) 

standard, with the support of the recording industry. 

When this Committee approved the Performance Rights Act in the last session of Congress, the standard 

selected was the 801(b) standard, modified to exclude the (D) factor, with the support of the recording 

industry. 

In the 37 years since the introduction of the 801(b) rate standard, its application has never required 

Congressional intervention. 

Deviations from the Federal Court System Limit Transparency and Create Abuse Potential 

The second inequity violates a most basic American principle of fairness: the CRB proceedings as 

structured under current law actually permit the recording industry to prevent evidence from being 

presented, even when the judges would consider it relevant. 

In federal courts, judges determine what evidence is admissible, and then they decide how much weight 

to give to various evidentiary submissions. Moreover, the Federal Rules of Evidence and Civil Procedure 

tend to undermine efforts by one party to hide relevant evidence. 

In contrast, royalty rate procedures empower parties to hide evidence and do not give the other party 

or the judges the authority to stop such shenanigans. 

One example occurred with an inflated royalty rate that the recording industry agreed to with SiriusXM 

several years ago that covered just SiriusXM's Internet radio performances, which are a tiny portion of 

SiriusXM's usage. By its terms, the recording industry was permitted to submit the license into evidence 

in Internet radio proceedings (for example, against Pandora), but not to submit it into evidence in 

satellite rate proceedings.4 This manipulation by the recording industry was clearly intended to keep 

4 U.S. Copyright Royalty Judges, Docket No.: 2011-1 CRB PSS/Satellite II, Rebuttal Testimony of Janusz Ordover 7-

02-2012, pp. 8-9, footnote 16 

5 
59 

Internet radio rates artificially high and current law allows them to keep the judges from even knowing 

that they are being hoodwinked. 

This is just one example of how the CRB process is unfair and what the Internet Radio Fairness Act will 

fix. 

Summary: The Time to Fix the Law Is Now 

In summary: 

Internet radio is enjoyed by over a hundred million Americans, and we embrace that this new form of 

radio compensates performing artists. 

Absent repeated Congressional interventions, today's Internet radio would not exist. 

The law which produced such disastrous results will be relied upon again in the rate setting process that 

begins in just 14 months. 

The time to fix that law is now. It will benefit artists, innovators, and the millions of Americans who 

cherish internet radio. 

Thank you. 

6 
60 

Mr. GOODLATTE. Mr. Reese, we are pleased to have your testimony. 

TESTIMONY OF BRUCE T. REESE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, HUBBARD RADIO, LLC, ON BEHALF OF 

THE NATIONAL ASSOCIATION OF BROADCASTERS 

Mr. REESE. Thank you Chairman Goodlatte, Ranking Member 

Watt, and Members of the Committee for hearing us today. My 

name is Bruce Reese. I’m president of Hubbard Radio. We operate 

20 radio stations in major markets around the country, including 

WTOP here in Washington. I’ve been in the industry for 30 years, 

and I’m testifying today on behalf of the National Association of 

Broadcasters and its members. 

Local broadcast radio is unique among music delivery platforms 

because it is always on, it is always free and it is accessible to listeners in every local community across the country. There are now 

more than 14,000 local radio stations in the United States. With 

a growing audience, over 240 million people listen to radio every 

week, including those in communities that are underserved by 

other communications platforms. Local radio is responsible for hundreds of thousands of American jobs and has been shown time and 

time again to be a lifeline during times of emergency. What makes 

broadcast radio so successful is the local flavor of our programming, which forges a unique collection with listeners in a way that 

other media do not. In a constant cycle of new technology, broadcast AM and FM radio has remained part of the fabric of American 

culture for more than 90 years. 

The Internet presents an enormous opportunity for broadcasters 

to expand both the reach and scope of locally-based services, including access to archive station materials, information about artists, and the ability to buy albums or concert tickets. Unfortunately, today many radio stations still do not stream their music 

over the web which does not help broadcasters or artists. There is 

one primary reason for the low adoption of Internet streaming by 

broadcasters: unaffordable royalty rates. For music-based radio stations the advertising revenue simply does not cover the streaming 

costs. Further, no matter how popular your Internet service becomes, the cost curve never bends in a favorable direction. At Hubbard, we’ve chosen to pay these high rates to stream our stations 

over the web because we believe our listeners expect us to be there. 

But even in our best years, we do no better than break even in our 

music webcasting business. 

We’re fortunate to operate in large markets and to have the financial ability to make that long-term investment. This is either a 

luxury that many of my industry peers do not have or a risk they 

are unwilling to take. Whatever the reason the majority of broadcast radio stations and the local services they provide remain outside the reach of Internet listeners. How did we get here? When 

initially set in 2007, and then built upon in 2009, the rates set by 

the Copyright Royalty Board were universally decried as being outrageously high. Four problems at the CRB contribute most significantly to these high royalties. First, the willing buyer/willing seller 

rate standard provides the judges with no explicit guidance on how 

to determine a fair market value. Second, the process by which the 
61 

parties present evidence of a fair market rate to the CRB is insufficient. Third, the CRB appointment and rate-setting processes do 

not afford adequate congressional oversight allowing these rate decisions to proceed essentially unchecked. And fourth, the CRB process itself is riddled with uncertainty. It’s telling that when NAB 

made our last offer to the musicFIRST Coalition during the last 

Congress, our members’ top priority was to escape the total unpredictability of the CRB proceedings. 

We’re here today to begin a dialogue with this Subcommittee on 

how best to address these problems. NAB has members who are 

very supportive of the bill introduced by Congressman Chaffetz and 

Polis. Other members are still seeking better understanding of how 

the bill would impact their businesses. So while NAB has not yet 

endorsed any specific legislative approach, it is fair to say that 

NAB supports congressional efforts to ensure fair webcasting rates 

and needed CRB process reforms. 

This important discussion over how best to encourage the growth 

of Internet radio must not be bogged down by past fights over the 

controversial performance rights bills. Recent deals between individual broadcasters and record labels have included fees for AM/ 

FM airplay. This reinforces our belief that this is an issue best addressed through private marketplace agreements. NAB continues 

to oppose an industry wide government mandate. Regardless of 

your position however on the performance fee issue, Congress can 

and should act to resolve the important webcasting rate making 

problems. The alternative inaction risks stifling the growth of 

Internet radio to the detriment of broadcasters, listeners and artists. Thank you, and I look forward to answering your questions. 

Mr. COBLE [presiding]. Thank you, Mr. Reese. 

[The prepared statement of Mr. Reese follows:] 
62 

NAB 

NATIONAl.lISsocOt,nON OF 8RO.o\OCASTEIIS 

Hearing on 

" Music Licensing Part One: Legislation in the 

112'h Congress" 

United States House of Representatives 

Committee on the Judiciary 

Subcommittee on Intellectual 

Property, Competition, and the Internet 

November 28, 2012 

Statement of Bruce Reese 

Hubbard Radio, LLC 

On behalf of the National Association of 

Broadcasters 
63 

Good afternoon, Chairman Goodlatte, Ranking Member Watt and 

members of the Subcommittee on Intellectual Property, Competition, and the 

Internet. Thank you for inviting me to testify today. My name is Bruce Reese, and 

I am President and CEO of Hubbard Radio, LLC, which operates 20 radio 

stations in five national markets. Before Hubbard made its April 2011 purchase of 

certain Bonneville International stations in Chicago, Washington, D.C, St. Louis, 

and Cincinnati, I was President and CEO of Bonneville International Corporation. 

I also chaired the Joint Radio and Television Boards of the National Association 

of Broadcasters (NAB) from 2004 through 2006. I am testifying today on behalf of 

the free, local, over-the-air radio members of the NAB. 

Introduction 

For over ninety years, broadcast radio has impacted the lives of 

Americans in many beneficial and significant ways. Radio broadcasters inform, 

educate, and alert our listeners to important events, topics, and emergencies. We 

introduce them to new music. We entertain them with sports, talk, and interviews. 

We are local, involved in our communities and proud to serve the public interest. 

Technological changes over the past decade have led to exciting new 

developments in the radio industry. Streaming, podcasting, HD radio, mobile 

devices, and other new digital platforms present both opportunities and 

challenges for radio broadcasters. Digital distribution is still only a small part of 

overall audio consumption, but it is providing innovative ways for us to reach and 

serve our listeners. 

2 
64 

I am here today to talk to you about a significant ongoing impediment to 

broadcasters' ability to innovate in the digital arena - namely, the current rate -

setting standard and procedures used at the Copyright Royalty Board (CRB) 

under the statutory license for streaming. 

The Standard and Procedures Used To Set Streaming Rates Discourage 

Streaming and Should Be Changed 

In the broadcast community, there is a wide array of opinions as to the 

viability and value of stream ing. Some broadcasters see stream ing as an 

essential, burgeoning revenue stream. Others regard it as tangential but also 

important to their core business of over-the-air broadcasting. Still others consider 

it as being not worth the investment, since it is nearly impossible for 

broadcasters' streaming revenue to exceed the associated costs and royalty 

payments. Regardless of the camp, every broadcaster's expansion into Internet 

radio is impeded by the unreasonable costs of webcasting royalties. Whether you 

are a large broadcaster or small broadcaster, or your station is based in 

Washington DC or Charlotte or Casper, the revenue that can be generated from 

streaming simply does not offset the costs. This imbalance is impeding the 

growth of Internet radio among broadcasters. 

Hubbard Radio streams our stations primarily as a service to our over-theair listeners. We stream all our stations in all our markets. We believe that 

listeners expect to be able to access our stations through the Internet in addition 

to listening to their radios, and in a way we consider the cost of streaming a 

promotional expense. Nevertheless, we work very hard to monetize the streams. 

3 
65 

Generally speaking, on a cumulative fiscal basis, we break even, with modest 

profits from the revenue from streaming our non-music stations offsetting the 

losses from streaming the music stations. Each year we revisit our streaming 

strategy and consider anew whether it's worthwhile to continue the service. 

Since webcasting began, the chief obstacle to developing a profitable 

streaming model has been the egregiously high royalty rates for sound 

recordings. The streaming rates that have resulted from proceedings by the 

Copyright Royalty Board (CRB) under the so-called "willing buyer/willing seller" 

standard have been artificially inflated, to the detriment of both services that wish 

to stream and the songwriters and performers who would benefit, in the form of 

increased exposure and royalties, from increased streaming. The "willing 

buyer/willing seller" standard has increased royalty rates to levels that are 

suffocating radio streaming services. This is likely true because absent any 

specific rate setting guidance, the theoretical "free market" in which willing buyers 

and willing sellers can freely negotiate does not actually exist. 

Broadcasters favor abandoning the "willing buyer/willing seller" standard 

and transitioning to the "801 (b)(1)" standard for setting sound recording 

performance royalty rates. The 801 (b)(1) standard (so named because it is found 

in that section of the Copyright Act) has effectively, efficiently, and equitably 

balanced the interests of copyright owners, copyright users, and the public for 

decades, in various contexts and proceedings. 1 

1 Instead of determining rates for a statutory license through a hypothetical 

marketplace, 17 U.S.C.§ 801(b)(1) sets forth four objectives to be considered: "(A) To 

maximize the availability of creative works to the public; (8) To afford the copyright 

owner a fair return on his or her creative work and the copyright user a fair income under 

4 
66 

As currently codified, this standard considers the interests of all 

stakeholders and the public, recognizes the value of all contributions of licensors 

and licensees, and has long been accepted and ratified by Congress. It reflects a 

Congressional intent not to set rates so onerous that they would stifle new 

businesses and uses of creative works. The 801 (b)(1) criteria are particularly 

appropriate where, as now, there are essentially three companies controlling the 

majority of the distribution of sound recordings. Despite their recent disapproval 

of the standard in the context of this statutory license, now that they are in the 

position of licensor, the recording industry does not complain about the 801 (b)(1) 

standard in the context of another statutory license, when they are acting as a 

licensee. 

The "willing buyer/willing seller" standard was perhaps most obviously 

inadequate when it led to rates for the 2006-2010 license period (set by the CRB) 

that were so egregious that webcasters were forced to directly appeal to 

Congress. Passage of the Webcaster Settlement Acts of 2008 and 2009 

provided an opportunity to negotiate more appropriate arrangements with the 

recording industry. 

But the flaws in the CRB rate-setting process go beyond the excessively 

high royalty fees themselves. Broadcasters cannot create predictable business 

plans for streaming if we don't know with any reasonable degree of certainty 

existing economic conditions; (e) To reflect the relative roles of the copyright owners 

and the copyright user in the product made available to the public with respect to relative 

creative contribution, technological contribution, capital investment, cost, risk, and 

contribution to the opening of new markets for creative expression and media for their 

communications; (D) To minimize any disruptive effect on the structure of the industries 

involved and on generally prevailing industry practices." 

5 
67 

what future rates will be. Further, the broadcasting business has been one built 

on fixed costs. It costs a radio station very little more to reach its millionth 

simultaneous listeners than it costs to reach its first. The statutory streaming 

fees, which increase on a per person, per listener basis, with none of the 

advantages that scale brings to most business models, are difficult to reconcile 

with the standard business practices of the broadcast industry. 

There is also a clear need to improve and update some of the CRB rules 

and procedures. This includes how stations report their music usage and how 

evidence is presented in CRB rate-setting proceedings. Another significant 

concern is the lack of Congressional oversight in the appointment process of the 

judges. 

Recent developments have further illustrated the dysfunction of the 

current rate-setting procedures. The constitutionality of the appointment of the 

CRB itself was recently called into question with an appeal before the D.C. 

Circuit Court of Appeals. And an additional complication to the broken CRB 

system came earlier this year when SiriusXM filed a lawsuit against the CRB's 

chosen collective, SoundExchange, and A21M (the American Association of 

Independent Music) claiming antitrust violations. This suit alleges that 

Sound Exchange and A21M conspired to prevent SiriusXM from negotiating direct 

licenses (which would take music out of the statutory royalty scheme 

administered by the CRB and SoundExchange). 

If anything, efforts should be made to facilitate and encourage direct 

licensing between the recording industry and those streaming music. Certain 

6 
68 

performers have recently argued that direct licensing would reduce their 

compensation. However, I would respectfully submit that, to the extent this 

Subcommittee might consider this to be a significant issue, it is imperative to 

evaluate performers' royalty payments in the larger context of their various 

streams of income, including how they are compensated by record labels. 

Congress Should Not Impose a Performance Tax on Broadcasters 

In beginning this important dialogue over how best to encourage the 

growth of Internet radio, Congress should not allow this debate to be bogged 

down by past fights over the performance tax, to which NAB remains staunchly 

opposed. For eighty years, American radio broadcasters and the music and 

recording industries have enjoyed a well-balanced relationship that has benefited 

all the parties. Record labels and performing artists profit from the free exposure 

provided by radio airplay, while local radio stations receive revenues from 

advertisers that purchase airtime to sell their products and services. 

Despite the many dramatic changes that have occurred in the digital 

music industry over the past decade, this interdependent relationship between 

radio and the music and recording industries remains fundamentally the same. 

Despite technological improvements, radio broadcasting retains the same 

basic character that it has had for decades. It is local. It is free to listeners. It is 

supported by commercial advertising. Local stations use on-air personalities and 

DJs to differentiate their programming, including by commenting on the music 

they play. While increasing, there is not an unlimited number of radio stations in 

the U.S., and listeners cannot choose what songs they will hear next, with the 

7 
69 

exception of call-in and request lines. In addition, radio is characterized by its 

public service to local communities and is subject to numerous Federal 

Communications Commission (FCC) restrictions and obligations. 

Many digital audio transmission services are eager to associate 

themselves with radio's rich history and consumer familiarity and affection, styling 

themselves as offering "radio" services. But simply marketing digital audio 

transmission services as "radio" does not make them so. 

In 1995 and 1998, Congress recognized the vast differences between 

digital audio transmission services and local radio when it created a limited digital 

sound recording performance right for those new services that diverged so 

dramatically from the nature of traditional radio. 

Now challenged by the economic downturn and financial threats posed by 

the rapidly changing digital environment, the recording industry is in search of 

additional revenue streams. But it is important to recognize that broadcasters are 

not responsible for the recording industry's financial woes. Broadcasters have 

continued to do their part in presenting music to the public in the same manner 

that they have done for decades. Particularly in the current highly competitive 

environment, where broadcasters are struggling to adapt their own business 

models to address the realities implicit in new media, it makes little sense to 

siphon revenues from local broadcasters for record labels to prop up the 

recording industry's past failings and ill-advised business decisions. 

8 
70 

Conclusion 

The relationship between the radio industry and the recording industry in 

the U.S. is one of mutual collaboration, with a long history of positive economic 

benefits for both. Without the airplay provided by thousands of local radio 

stations across America, the recording industry would suffer immense economic 

harm. Local radio stations in the U.S. have been the primary promotional vehicle 

for music for decades; it is still the primary place where listeners are exposed to 

music and where the desire on the part of the consumer to acquire the music 

begins. 

The radio industry looks forward to a robust future that embraces the 

fundamental nature of broadcasting, as well as new opportunities arising from 

evolving digital technologies. But as we seek to develop business models that 

include streaming, we are continually thwarted by one consistent problem -

statutory royalty rates and the dysfunctional rate-setting system and procedures. 

In short, the royalty rate setting process has become a royal mess, and an 

opportunity to remedy that situation would be embraced by all who stream music. 

Broadcasters welcome the opportunity to discuss reform of this dysfunctional 

process in greater detail. 

9 
71 

Mr. COBLE. Mr. Pakman you’re recognized for 5 minutes. 

TESTIMONY OF DAVID B. PAKMAN, PARTNER, VENROCK 

Mr. PAKMAN. Thank you, Chairman Goodlatte, Ranking Member 

Watt and Members of the Subcommittee. Thank you for inviting 

me here today to testify regarding the state of Internet music radio 

licensing. I’m a venture capitalist with the firm Venrock. We invest 

in early stage Internet health care and energy companies and work 

to build them into successful standalone high growth businesses. 

We look to invest in outstanding entrepreneurs intending to bring 

exciting new products to very large and vibrant markets. Our firm 

has invested more than $2.6 billion into more than 450 companies 

over the past 40 years. These investments include Apple, 

Athenahealth, Check Point Software, Intel and DoubleClick. Although I was previously a multi-time entrepreneur in the digital 

music business, we are not currently investors in any digital music 

or Internet radio companies. As venture capitalists we evaluate 

new companies largely based on three criteria: The abilities of the 

team, the size and conditions of the market the company aims to 

enter, and the quality of the product. Although we’ve met many 

great entrepreneurs with great product ideas, we have resisted investing in digital music largely for one reason: The complications 

and conditions of the state of music licensing. The digital music 

business is one of the most perilous of all Internet businesses. We 

are skeptical under the current licensing regime that profitable 

standalone digital music companies can be built. In fact, hundreds 

of millions of dollars of venture capital have been lost in failed attempts to launch sustainable companies in this market. While our 

industry is used to failure, the failure rate of digital music companies is among the highest of any industry we have evaluated. This 

is solely due to the overburdensome royalty requirements imposed 

upon digital music licensees by record companies under both voluntary and compulsory rate structures. The compulsory royalty 

rates imposed upon Internet radio companies render them 

noninvestible businesses from the perspective of many VCs. 

The Internet has delivered unprecedented innovation to the 

music community and allowed more and more artists to be heard 

unfiltered by the incumbent major record labels and terrestrial 

radio stations. I believe more people listen to a more diverse set of 

music today than ever before in our time. However, the companies 

trying to deliver these innovative services are unsustainable under 

the current rates and frequently shut down once their investors 

grow tired of subsidizing these high rates and illusive profits fail 

to arrive at any scale. Pandora is a company that’s done an amazing job of trying to make their business work at the incredibly high 

rates under which it currently operates. 

But their quarterly earnings reports make abundantly clear why 

they are virtually alone in this category. Regretfully I cannot point 

to a single stand-alone business that operates profitably in Internet 

radio. In fact, in all of digital music, only very large companies who 

subsidize their digital music efforts with profits from elsewhere in 

their business currently survive as distributors or retailers of 

music. 
72 

There was a time when record companies were part of conglomerate media companies which also distributed the music they controlled. These joint owners and users of music appreciated the need 

for healthy economics on both sides of a license. Once the Internet 

emerged, new distributors or users of music grew outside of major 

label ownership. Perhaps in response to their failure to prosper as 

Internet distributors of music, the major labels took at short-term 

approach and refused to license their music on terms that would 

allow the music users to enjoy healthy businesses. 

To this day, more than 15 years since I first entered the digital 

music business, I remain baffled by this practice. In my opinion, it 

is in the long-term best interests of music rights holders to encourage a healthy, profitable digital music business that attracts investment capital, encourages innovation, and indeed celebrates the 

successes of the licensees of its music. A healthy future for the recorded music business demands an ecosystem of hundreds or even 

thousands of successful music licensees, prospering by delivering 

innovative music services to the global Internet. Yet the actions of 

the RIAA seem counter to this very goal. They have appeared on 

the opposite side of every issue facing digital music innovators, opposed to sensible licensing rates meant to achieve a healthy market. Regretfully, and, perhaps most upsetting to all of us, the artists are the ones who suffer most. They depend on the actions of 

their labels to encourage a healthy market to grow, and have little 

influence on the decisions of the RIAA. 

I am a believer in the value of open and unfettered markets and 

generally prefer market-based solutions. Unfortunately the music 

industry is controlled by a mere three major labels, two of them 

controlling about two-thirds of all record sales. That amount of concentrated monopoly power has prevented a free market from operating and letting a healthy group of music licensees thrive. 

That said, I do believe there has been great value in compulsory 

licensing regimes such as the one governing Internet radio. This 

structure has allowed Internet radio companies to license the catalogs of all record labels and tens of thousands of independent artists, not just the dominant majors. 

The problem is simply that the rates available to Internet radio 

companies under this compulsory license are too high. They frighten off investment capital, prevent great entrepreneurs from innovating, and they kill off exciting attempts to bring their music services to consumers. 

I would like nothing more than to invest in the many entrepreneurs we have met with great ideas about the future of music, 

but without a sensible rate structure in place, our focus on this 

market won’t be able to return. 

Thank you. 

Mr. COBLE. Thank you, Mr. Pakman. 

[The prepared statement of Mr. Pakman follows:] 
73 

Testimony of David B. Pakman 

Partner 

Yenrock 

u.s. House of Representatives Committee on the Judiciary 

Subcommittee on Intellectual Property, Competition and the Internet 

Hearing on "Music Licensing Part One: Legislation in the 112th Congress" 

November 28,2012 

Chairman Goodlatte, Congressman Watt, and Members of the Subcommittee: 

Thank you for inviting me to testify today regarding the state of internet music radio licensing. I 

am a venture capitalist with the firm Venrock. We invest in early stage internet, healthcare and 

energy companies and work to build them into successful, stand-alone, high-growth businesses. 

We look to invest in outstanding entrepreneurs intending to bring exciting new products to very 

large and vibrant markets. Our firm has invested more than $2.6 billion in more than 450 

companies over the past 40 years. These investments include Apple, Athenahealth, Check Point 

Software, Intel and DoubleClick. 

Although I was previously a multi-time entrepreneur in the digital music business, we are not 

currently investors in any digital music or internet radio companies. 

As venture capitalists, we evaluate new companies largely based on three criteria: the abilities of 

the team, the size and conditions of the market the company aims to enter, and the quality of the 

product. Although we have met many great entrepreneurs with great product ideas, we have 

resisted investing in digital music largely for one reason - the complications and conditions of 

the state of music licensing. The digital music business is one of the most perilous of all internet 

businesses. We are skeptical, under the current licensing regime, that profitable stand-alone 

digital music companies can be built. In fact, hundreds of millions of dollars of venture capital 

have been lost in failed attempts to launch sustainable companies in this market. While our 

industry is used to failure, the failure rate of digital music companies is among the highest of any 

industry we have evaluated. This is solely due to the over-burdensome royalty requirements 

imposed upon digital music licensees by record companies under both voluntary and compulsory 

rate structures. The compulsory royalty rates imposed upon internet radio companies render them 

non-investible businesses from the perspective of many YCs. 

The internet has delivered unprecedented innovation to the music community and allowed more 

and more artists to be heard unfiltered by the incumbent major record labels and terrestrial radio 

stations. I believe more people listen to a more diverse set of music today than ever before in our 

time. However the companies trying to deliver these innovative services are unsustainable under 

the current rates and frequently shut down once their investors grow tired of subsidizing these 

high rates and elusive profits fail to arrive at any scale. Pandora is a company that has done an 

amazingjob of trying to make their business work at the incredibly high rates under which it 

currently operates - but their quarterly earnings reports make abundantly clear why they are 
74 

Mr. COBLE. Mr. Jam. 

TESTIMONY OF JIMMY JAM, CHAIR EMERITUS, THE RECORDING ACADEMY, RECORD PRODUCER, SONGWRITER, RECORDING ARTIST 

Mr. JAM. Thank you, Chairman Goodlatte, Ranking Member 

Watt and Members of the Subcommittee. My name is Jimmy Jam. 

I am a record producer, recording artist, songwriter and small business owner. I am also the chair emeritus of the Board of The Re-
75 

cording Academy, known for producing the Grammy Awards. The 

Recording Academy is the trade association that represents the individual performers, songwriters and studio professionals who create the music enjoyed around the country and around world. I am 

also a member of the American Federation of Musicians, SAGAFTRA, and ASCAP. I am honored and grateful for the opportunity 

to present the music creators’ viewpoint at this important hearing. 

Now, as a record producer I have had the privilege of working 

with some of the finest recording artists, including Usher, Mariah 

Carey, the Isley Brothers, Willie Nelson, Yolanda Adams and many 

others. And while their names are well known, if you came to my 

studio on any given day, you would see dozens of people who you 

have never heard of employed as session musicians, background 

singers, songwriters, engineers and other professionals who all derive their income from creating music. The majority of Recording 

Academy members are middle-class artists; music is not just their 

lives, but their livelihood. 

As a small business owner, I know firsthand that bringing music 

to the American public takes time, investment, talent, and the passion of many remarkable individuals, but while music is our passion, it is also our job, and, like any job, we hope to be paid fairly 

for our work. So let us compare two of the ways creators get paid 

in the digital era. 

If a consumer downloads a song from Amazon, they pay the 

rights holders and creators about 70 cents. If a consumer streams 

that same song on Pandora radio, Pandora pays SoundExchange 

about one-tenth of 1 penny; or, put another way, the listener would 

have to hear that song on Pandora every single day for nearly 2 

years to equal the payments earned from the one download on 

Amazon. 

So when Pandora tells you it is paying too much, think about 

that tenth of a penny, and then remember that small amount is 

shared by the copyright owners, featured artists, session musicians, 

singers and producers. That is why the Recording Academy opposes 

H.R. 6480, the Internet Radio Fairness Act, which would lower 

these already small payments by as much as 85 percent. And while 

Pandora is trying to lower the earnings of artists through legislation, it is also seeking to lower its payments to songwriters in rate 

court. We oppose both efforts. 

The Internet Radio Fairness Act is ironically named. First, it is 

hardly fair to ask the very people who enable Pandora’s business 

to work for below-market payments. But even worse it fails to mention the most unfair aspect of the music royalty debate. 

Now, if I told you, the congressional leaders responsible for IP 

policy, that one business in America is allowed to take and use another’s intellectual property without permission or compensation, I 

think you would say, that is crazy. Well, one such business does 

exist: the radio broadcast industry. 

Through unbelievable exemption in the law, terrestrial radio is 

allowed to take and profit from any sound recording without paying 

a single penny to those that create the track. Now, this is the only 

industry in America that is allowed to do this, and the United 

States is the only developed country in the world that provides 

such an exemption for its broadcasters. We believe that before 
76 

there can be any discussion of rates or rate standards, Congress 

should close the corporate radio loophole. 

Chairman Goodlatte, the Internet Radio Fairness Act is anything 

but fair, but by all means it is time to have a real conversation 

about fairness. For example, is it fair for Pandora, which already 

enjoys the benefit of a compulsory license, to also enjoy a government-imposed, below-market rate? Is it fair for songwriters who 

provide the very DNA of the music industry to have to fight Pandora in court just to keep their already small payments? And finally, is it fair for terrestrial broadcasters to pay nothing for using 

the sound recordings because they, not we, have decided that it is 

good for us? 

The answer to all these questions is clearly no. Members of the 

Subcommittee, if you agree that music creators should be paid fairly for their work, then I ask that you oppose H.R. 6480, and that 

we all work together to support fair-market royalties paid by all 

who use music as the foundation of their business. 

Thank you. 

Mr. COBLE. Thank you, Mr. Jam. 

[The prepared statement of Mr. Jam follows:] 
77 

'f{ostimony of 

Ji:nnuy Jam 

Chair Emeritus, Board of Trustees 

The Recording Academy 

and 

Record Producer, Songwriter, Recording Artist 

Before the U.S. House ofRepresentatiws 

C01ll1l\ittee on the Judiciary 

Subcommittt"e on Intt"llectual Property, Competition, and the Internet 

Washington, DC 

.. Music Liceusiug Part One: Legislation in the 112th Congnss" 

November 2S, 2012 

Chairman Goodlatte, Ranking )'lember Watt, and members ofthe Subcommittee: My name is 

Jimmy Jam. I'm a record producer, recording artist, songwriter, and small business owner. I am 

also Chair Emeritus of the Board of The Recording Academy. Known for producing the 

GRAM MY Awards, The Recording Academy is the trade association that represents the 

individual performers, songwriters and studio professionals who ere·ate the music enjoyed around 

the country and around the world. I am also a member ofthe American Federation of Musicians, 

SAG-AFTRA and ASCAP. I am honored and grateful for the opportunity to present the music 

creator's viewpoint at this important hearing. 

i\.~ ~ record producer. 1',,<0 h~d the privilege of working with some (lfthe fmest recording artists. 

inchlding Usher. Mariah Carey. The Isley 13rothers. Sting and Yoliltlda AdiltllS. And while their 

ll~m<os arc well known. ify.ou Ciltlle to my studio on any given day. yon wonld sec dozens of 

people you~ve llt:::Yer hljard of'employed as sessiolllllllsicians, ha(:kground singers, songwriters, 

engineers and others prolh%ionals who derive their income Irom neallng music. 

The majority of Recording Academy members are middle class artists. llilusic is not just their 

lives, but their livelihoods. 

As a small business owner, I know first-hand that bringing music to the American public takes 

investment. time. and the t.~1cnh and passion of mallY remarkabk indi\iduak 

But while Illusic is our passion, it's also our joh. And as with anyjoh, we hope [0 be paid lilirl)' 

Ii)r our work. 

So let's compare two ways creators get paid in the digital era. 

1 
78 

Ii a conSUllltlr downloads a song Ii-olll Alllazon's Illp:1 slore iilr 99 Cdl!s, AnulI.on pays Ihe righls 

holders and crealors about 70 cents. If a consumer slreams (hal same song 011 Pandora radio, 

Pandora pays SoundExchang~ about one tenth of one penny. Or put anoth~r way, the listener 

would have to hear that song on Pandora every single day for nearly two years to equal the 

payments earned from that one download. 

So when Pandora tells you it's paying too much to the creators who are the backbone of its 

business, think ahout that tenth of a penny-and remember that small amount is shared by 

cop]-yight owners, featured artists, session musicians, singers, and produc~rs. We're talking 

about very little money p~r play. 

That's why the Recording Academy opposes H.R. 64RO, which would lower these already small 

paymenls by as Illueh as RS percen!. 

Ifs also important to note that while Pandora is ttying to lowcrtlic call1ings of artists through 

legislation, it is sinlllltallcously s~cking to lowcr its paymcnts to song\'11tcrs in ratc court. As an 

organization that rcprescllls both artists and songwritcrs, 11lC Recording Acadcmy opposes both 

th~ Internet Radio Faim~ss Act as well as any attempts to lower paym~nts to songwriters. 

The Internet Radio Fainless Act is ironically named. First, it's hardly fair to ask the very people 

who ~nable Pandora's business to work for below-market paym~nts. But p~rhaps even worse, it 

n~glects to mention the most unfair aspect of all in the music royalty d~bate. So while we 

discuss these digital platfoffilS. w~ must also address an important inequity in the analog world. 

If I told you - the Congressional leaders responsible for LP. policy - that one business in 

Am~rica is allowed to take and use another's intellectual property without permission or 

compensation, I think yon would find that patently unjust. Well, one ,uch business docs exist 

the radio broadcast indmJtl"Y, 'Ibrough an incxplicable cxcmption in the law. tcrrcstt'ial radio is 

allowcd to take and profit Jimn any sound rccording without paying a single pcnny to thosc 

who crealed Ihe Inwk. Thi~ is (he only induslry in America allowed Wdl a laking, and Ihe 

Uniled ~>tales is Ihe only tl~veH)ped counlry in Ihe world Ihal provides wch an exemplion 10 ils 

broadcasters. 

The NAB will tell you, on the basis of a few deals with independent record labels, that the 

marketplace will solv.o this problem. But we need Congress to provid.o an industry-wide solution 

iliat covers all broadcasters and all artists. And if you don't believe m~, take it from the architect 

of the first ofthesc pdvat~ marker dcals. Scott Dorchctta, the CEO of Dig :'vIa chine Records who 

madc thc tin,1 private deal that includes a tC1Tcstt'ial royalty, scnt a letter TO Congress noting tllC 

reasons why privale deals are not a sub"lilule it)r legislation. Aml I would ask Ihill his Idler be 

suhmilled inlo Ihe record. 

Private deals between a few labels and broadcasters cannot create a performance right - only 

Congress can. And until this inlportant right is established in law, the rnit~d States will 

continue to lose tens of millions of dollars each year as money is collected for American music 

played in foreign counties - revenue rightly belonging to American creators and businesses - but 

not shared with us because we lack a performance right. 

2 
79 

Mr. COBLE. Dr. Eisenach. 

TESTIMONY OF JEFFREY A. EISENACH, MANAGING DIRECTOR 

AND PRINCIPAL, NAVIGANT ECONOMICS 

Mr. EISENACH. Mr. Chairman and Mr. Ranking Member, Members of the Subcommittee, thank you for the opportunity to testify 
80 

before you today. I thank Mr. Goodlatte for his kind introduction 

and note that while the research upon which my testimony is based 

was partially supported by the musicFIRST Coalition, I am appearing solely on my own behalf, and the views I will express are exclusively my own. 

I have submitted written testimony, and I would like to briefly 

summarize it. 

Beginning with the Digital Performance Right in Sound Recordings Act of 1995, and continuing with the Digital Millennium Copyright Act in 1998, Congress has adopted an increasingly marketoriented approach to sound performance recording rights. 

Under DMCA, license terms and royalty rates for nearly all parties are either negotiated directly between the parties or, in the 

case of rights subject to a compulsory license, are set so as to, 

quote, ‘‘represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing 

seller.’’ Twice in recent years this Subcommittee has passed legislation that would have extended this market-based approach to overthe-air broadcasting. 

My central point today is that Congress is on the right track and 

should not turn back by passing legislation designed to subsidize 

a particular class of copyright users. I am referring, of course, to 

the proposed Internet Radio Fairness Act, or IRFA, and especially 

to the proposal to replace the market-oriented willing buyer/willing 

seller standard with the uneconomic four-part standard under section 801(b) of the Copyright Act of 1976. Doing so would distort the 

marketplace and harm consumers for four primary reasons. 

First, market-based rates maximize consumer welfare by ensuring that society’s resources are directed to their highest-valued 

uses. In a market-based economy like ours, prices serve as the key 

signaling mechanism telling economic actors how capital and labor 

should be directed to produce products and services valued most 

highly by consumers at the lowest possible cost. Replacing the market-based willing buyer/willing seller standard with the downwardbiased 801(b) standard would result in the misallocation of economic resources and ultimately make consumers worse off. 

Second, there is no valid economic or public policy basis for forcing content providers to subsidize webcasters by charging them the 

below-market rates that would almost surely result from IRFA. 

The market for online music is intensely vibrant and growing rapidly. Online advertising revenues are growing 30 percent per year. 

New firms are entering the market, existing firms are garnering 

billion-dollar valuations, and the mobile marketplace, as Pandora 

notes prominently in its most recent financial reports, is getting 

ready to take off and explode. 

Pandora makes much of the fact that content acquisition accounts for half or more of its revenues, but in reality its content 

costs as a proportion of revenues are comparable to other similar 

firms. Moreover, the ratio of Pandora’s content costs to its revenues 

is within Pandora’s control. As The New York Times put it recently, throughout the music industry there is a wide belief that 

Pandora could solve its financial problems by simply selling more 

ads. 
81 

Third, the fourth prong of section 801(b), the nondisruption 

standard, would grant copyright users a de facto right to perpetual 

profitability based on their current business models. In fact, copyright users are arguing in the current SDARS II proceeding that 

the nondisruption standard guarantees them a profit not only on 

their past investments, but on future investments as well. 

In the dynamic world of online content delivery, the creation of 

what amounts to a right of eternal life for market incumbents is 

a recipe for technological and marketplace stagnation. 

Fourth and finally, passage of IRFA would risk politicizing the 

rate-setting process for sound recording performance rights. The 

changes it would make to the appointment process and qualifications of the copyright royalty judges would reduce the objectivity 

and independence of the CRB. 

More broadly, as you all know, all firms would prefer to pay 

lower prices for their inputs. Car manufacturers would like to pay 

less for steel, filling stations less for gasoline, aluminum plants less 

for electricity. In general, markets ensure that the prices paid for 

such inputs are, to paraphrase Goldilocks, neither too high nor too 

low, but just right. 

The politicization of pricing decisions, on the other hand, favors 

those with the greatest capacities for political influence. In this 

case Congress should not allow the fact that webcasters have the 

demonstrated capacity to generate a large volume of emails from 

their listeners to lead to a result that would in the end harm those 

very same consumers by retarding innovation and destroying incentives for content creation. 

Mr. Chairman and Members of the Subcommittee, that completes 

my testimony. I look forward to your questions. 

Mr. COBLE. Thank you, Doctor. 

[The prepared statement of Mr. Eisenach follows:] 
82 

TESTIMONY 

OF 

JEFFREY A. EISENACH, PH.D. 

BEFORE THE SUBCOMMITTEE ON 

INTELLECTUAL PROPERTY, COMPETITION AND THE INTERNET 

COMMITTEE THE JUDICIARY 

UNITED STATES HOUSE OF REPRESENTATIVES 

November 28,2012 

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity to appear before 

you today to testify on issues relating to music licensing. 

I currently serve as a Managing Director at Navigant Economics, a Visiting Scholar at the 

American Enterprise Institute and an adjunct professor at George Mason University Law School, 

where I teach the course on Regulated Industries. In all of these capacities, and for much of the 

past two decades, I have written about and taught on topics relevant to the subject of today's 

hearing. While some of the research upon which my testimony today is based was supported in 

part by the musicFlRST coalition, I am appearing today solely on my own behalf, and the views 

I will express are exclusively my own. 

My testimony today focuses on the sound recording performance right and, in particular, on what 

is commonly referred to as the digital performance right.! As the Subcommittee knows well, 

until recently, owners of sound recording performance rights were granted reproduction and 

distribution rights, but - unlike the holders of musical work rights - were not granted a 

performance right. Thus, copyright holders of sound recordings could monetize the copying and 

distribution of their recordings, but could not charge for "performances," such as when radio 

stations (or web casters) played copyrighted music. Tn the absence of such a property right, 

naturally, there was no market for sound recording performances. 

Beginning with passage of the Digital Performance Right in Sound Recordings Act (DPRA) in 

1995,2 Congress has moved gradually in the direction of both creating performance rights and 

putting in place the conditions to allow such rights to be traded at market (that is, economically 

efficient) rates. The DPRA established the first sound recording performance right in the form of 

the digital performance right. Then, in the 1998 Digital Millennium Copyright Act (DMCA), 

Congress established the principle that license terms and royalty rates would either be negotiated 

directly between the parties or, in the case of rights subject to a compulsory license, would 

"represent the rates and tenns that would have been negotiated in the marketplace between a 

willing buyer and a willing seller.'" Twice in recent years, this subcommittee has passed 

1 I have recently authored a study on the sound pcrronnancc recording right \vhich addresses many or the issues 

discussed herein. It is included in this \vritten statement as Attaclul1ent A. 

, Digital Performance Right in Sound Recordings ,~ct 0/1995. Pub. L. No. 1O~-39. 

3 17 V.S.c. § 114(f)(2)(B). 
83 

legislation that would have further advanced market-based principles by extending the sound 

performance right to the over-the-air broadcasts of terrestrial broadcasters4 

The central point of my testimony today is that Congress should continue to move in the 

direction of using market-based mechanisms for setting the terms and rates by which sound 

recording performance rights are licensed among rights holders and users. Equally important, it 

should resist entreaties to backslide by passing legislation that would replace the current marketbased standard for royalty rates with one designed to tilt the playing field in such a way as to 

subsidize a particular class of copyright users. 

I am referring, of course, to the proposed Internet Radio Fairness Act (IRFA, H.R. 6480/S. 

3609). While the IRFA contains a number of provisions designed to tilt the rate-setting process 

in favor of copyright users and against copyright holders, at its core is its proposal to replace the 

market-oriented willing buyer/willing seller standard with the uneconomic, four-part standard 

under Section 801(b)(I) of the Copyright Act of 1976 (the "801(b) standard"). To do so would 

represent a significant step in the wrong direction, both because the rates likely to emerge from 

the rate setting process would be below those that would emerge trom a competitive market, and 

thus reduce economic welfare, and because the "non-disruption" standard contained in Section 

80 I (b)( I )(D) would create perverse incentives that are fundamentally at odds with the 

innovative, dynamic nature of the market for online music. 

Specitically, replacing the willing buyer/willing seller standard with the 80 I (b) standard and 

making the other changes proposed by the IRF A would harm consumers for four primary 

reasons. 

(I) Market-based rates result in the efficient - i.e., consumer-welfare-maximizing -

allocation of society's resources, and the willing buyer/willing seller standard embodies 

the principle of market-based rates. 

(2) The lower rates that would result trom the IRFA are not necessary to preserve a vibrant, 

growing market for online music, and would harm the market for content creation. 

(3) The non-disruption standard contained in Section 801(b)(l)(D) is fundamentally 

inconsistent market-based incentives for efficiency and innovation, especially in a 

dynamic market such as the market for digital music. 

(4) Adoption of the IRFA would distort the rate setting process and likely result in the further 

politicization of rate setting for sound performance rights. 

Let me expand brietly on each reason. 

First, market-based rates maximize consumer welfare by ensuring that society's resources are 

directed to their highest valued uses. Tn a market-based economy like ours, prices serve as the 

key signaling mechanism telling economic actors how capital and labor should be directed to 

, See TIle Perfonnance Rights Act of 2007 (RR. ~ 789/S. 2500) "nd its successor, The Perfoffilllllce Rights Act of 

2009 (RR 8~8/S. 379). 
84 

produce the products and services valued most highly by consumers at the lowest possible cost. 

Prices set above market-clearing levels result in too many resources being directed towards 

production, while at the same time too little of the resulting output is demanded by consumers. 

Prices set below market clearing levels have the opposite effect - too little is produced, and 

consumers are unable to procure the amount, or the quality, of products they desire. 

As I detail in Attachment A, the willing buyer/willing seller standard has been implemented in 

such a way as to produce royalty rates consistent with those that would likely result from a freely 

functioning market. Tn particular, the arbitration bodies that have set rates in the major 

Webcaster proceedings have based their determinations on freely negotiated rates for analogous 

products, e.g., the rates for interactive services, which are not subject to a compulsory license. 

While no rate setting process is perfect, the procedures followed by the Copyright Arbitration 

Royalty Panel (in Wehcasrer J) and by the Copyright Royalty Board (in Wehcasrer II and 

WebcClster JJT) - which include opportunities for all sides to fully present their positions, 

supported by expert economic and industry testimony, as well as both administrative and judicial 

review - have likely yielded rates that reasonably approximate those that would have resulted 

from voluntary negotiations in a freely operating market, and thus are presumptively consumerwelfare-maximizing. 

Second, while IRF A would almost certainly produce the lower royalty rates its supporters seek, 

there is no valid economic or public policy basis for forcing content providers to subsidize 

web casters by charging them below-market rates. The market for online music is intensely 

vibrant and growing rapidly. Tens of thousands of new listeners are signing up to services like 

Pandora and Spotify every week, and existing listeners are using the services more and more 

intensely every year. Online advertising revenues are growing 30 percent per year, new firms 

are entering the market at a rapid pace, and existing firms are garnering billion dollar market 

valuations. 

IRFA's leading supporter, Pandora, makes much of the fact that content acquisition accounts for 

a large proportion of its revenues, but in fact its content costs as a proportion of revenues are 

comparable to other, similar firms. For example, as I detail in the attachment, the proportion of 

revenues accounted for by content costs for Netflix and Pandora have been nearly identical over 

the last three years (2009-20 11) for which data is available from both finns; indeed, for each of 

the last two years, Netflix has paid a higher proportion of its revenues for content acquisition 

than has Pandora. 

Moreover, and crucially, the ratio of Pandora's content costs to its revenues is well within 

Pandora's control: To raise its revenues, it need only choose to sell additional advertising. As 

The New York Times reported recently, "Throughout the music industry there is a wide belief that 

Pandora could solve its tinancial problems ... by simply selling more ads.'" 

See Ben Sisario_ "Proposed Bill Could Change Royalty Rates for Internet Radio_" The New York Times (September 23_ 

2(12) (avai lable at bl1iYi i\Y\\\1t.!l\'ti mes.Ct)1]1'20 I ZJl.9.·2J/bnsine~s·mediJ ·~1~d-bill~luld-change-r(lYillIY:nl.Tes-f.£'.I:.i.DternU:: 

radt'J.hlllll). See also RIchard Grccnlicld, "Congress Should be "'lurking to Raise Royally Rates on Pandora_ Not Lower Them_" 

RTJ(T ReSC{lrch (September 24, 2(12) (available at http://www.htigresearch.com/2012/09/24/congress-should-he-working-toraisc-royally-ralcs-on-pandora-not-lowcr-thcm') C-[T]hc rca son why companic::; such as Pandora pay such high royalty ralcs as a 

percentage of revenues is becau'ie they severely limit audio advertising to protect the user experience and keep people on the 

platform. TfPandora ran several minutes of audio ads per hour (the way terrestrial radio does) vs. just a few 15 sec. spots, the ~o 
85 

Third, the Section 801(b)(I)(D) non-disruption standard would fundamentally distort the rate 

setting process by granting users a defaclo right to perpetual protltability based on their current 

business models. Indeed, as I detail in the attachment, experts testifying on behalf of copyright 

users in the current STJARS rr proceeding have argued that the non-disruption standard not only 

requires rates to be set so as to h'llarantee copyright users profits on their initial investments, 

apparently in perpetuity, but even to ensure that they can "recover the financial cost of capital for 

forward-looking investments," since rates that fail to give users incentives to continue investing 

in their businesses would be "disruptive." 

In the dynamic world of online content delivery - in which new and improved business models 

are constantly replacing old, obsolete ones - the creation of what licensees argue is a de facto 

right to perpetual protltability is a recipe for technological and marketplace stagnation 6 

Fourth, and t1nally, both the act of passing the IRFA and a number of its specitlc provisions 

would distort the rate setting process and likely result in the further politicization of rate setting 

for sound recording performance rights. As I detail in the attachment, a number of the IRFA's 

specitlc provisions, including the changes it would make to the appointment process and 

qualifications of the copyright royalty judges, would threaten to reduce the objectivity and 

independence of the CRB. 

More broadly, it is a truism that all market participants would prefer to pay lower prices for their 

inputs - car manufacturers would like to pay less for steel, gas stations less for gas and soft 

drinks, aluminum plants less for electricity. In the absence of market failures, however, market 

forces ensure that the prices paid for such inputs are, to paraphrase Goldilocks, neither too high 

nor too low, but "just right." The politicization of pricing decisions, on the other hand, results in 

prices which favor the actors with the greatest capacities for political influence. In this case, 

Congress should not allow the fact that web casters have the demonstrated capacity to generate a 

large volume of emails from their listeners to lead to a result that would, in the end, harm those 

very same consumers by retarding innovation and destroying incentives for content creation. 

Mr. Chairman and Members of the Subcommittee, that completes my testimony. I look forward 

to any questions you may have. 

of revenues paid out as royalties \vOlild be dramatically lower and would be more in line with satellite radio or cable IV. 

Tnterestingly, Spotiry's radio producl TUns substantially more udvcrlising per hOLlr lhan Pandora."). 

6 By contrast as the D.C. Circuit explained in reviewing the Trebcaster II decision, the willing buyer/willing seller 

standnrd docs not require rales to be set so as to preserve incfricicnt business models. Sec Jnlerco/legiale TJroadcaSl 

System v. Co{!.,riy,hl Rovallv /!oard 57~ F. 3d 7~8. 761 (D.C. CiT. 2(09) (""IIJt was not error for the Judges to reject 

the small cOTIlll1ercial webcasters - pleas that paying per perfonnance would wreck their inefficient business models. 

The Judges made clem they could not' .6'l.urrantee a profitable business to every market entrant. - The Judges are not 

required to preserve the business o/e\'er:vparticipant in a market,") (emphasis added), 
86 

Attachment A 

The Sound Recording Performance Right at a 

Crossroads: Will Market Rates Prevail? 

JEFFREY A. EISENACH';' 

Starting in the /990s, Federal policy has moved in the direction of a market-orie11led 

approach towards sound recording rights, heginning with Congress' decision to create a 

sound recording performance copyright in /995. In /99R, Congress provided thal most 

statutory royalty rates, including the rates paid hy lVehcasters like Pandora Radio, would 

he set using a market-hased "willing huyer, willing seller" (WHWS') standard. Since then, 

the WHWS standard has heen applied in several rate setting proceedings, hut complaints 

from wehcasters that the rates were "too high" have led to Congressional intervention 

and. ultimately, to adoption 'if rates below market levels, Now, as a new rate setting 

cycle is about to get underway, web casters have hegun lobbying Congress to replace the 

WBWS standard with a new version 'if the so-called 1301(h) standard, which promises 

copyright users a right of "non-disruption . .. Adoption of the 801(b) standard - and the 

other changes favored hy the wehcasters - would result in rates helow economically 

efficient levels. therehy distorting markets. slowing innovation and harming consumers. 

'Ihis paper examines the market jiJr sound recording pel10rmance right~. concluding that 

Congress should resist wehcasters' pleasjiJr regulatory favoritism and instead continue 

moving towards a market-oriented approach, starting with extending the sound 

perjiJrmance right to terrestrial radio. 

1. IKTRODUCTION ............................................................................................................ 2 

II. Tm: SOliNIl RI':CORIlIN(; PI':RHlRvIAf\CI'. RICill)': A BRIEII HiSTORy ........................... 4 

A. 'Ihe /Jigiral Perjimnance Rights Act ...... ............................................................... 5 

H. 'Ihe /Jigiral Millennium Copyright Act ................................................................. 7 

III. TilE SOUND RECORJ)]NG PERJlORvlAKCE RIGIITTK PRACTICE ..................................... ') 

A. Web caster Rates and the Willing Buyer/Willing Seller Standard ..................... 10 

1. Wehcaster i ................................................................................................ 11 

2. Wehcaster ii ............................................................................................... 15 

3. The Web caster Settlement Act and the 2009 Compromise ......................... 17 

4. Webcaster 11i ............................................................................................. 18 

B. Section 801 (b) and the "Non-Disruption" Standard ........................................ 20 

I. Far~v Interpretations 'if the SIII(h) Standard ........................................... 21 

2. SDARS i ..................................................................................................... 22 

3. SDARS ii .................................................................................................... 23 

IV. BEYOND THE NOK-DISRUPTIOK STA'lDARD: THE PROPOSED INTERKET RADIO 

FAIRNESS ACT AND THE MARKET FOR ONLI"E MUSIC ............................................. 25 

A. The iRF A Would Dramatically Tilt the Rate Setting Process in Favor of 

Web casters ........................................................................................................ 25 

B. The iRFA is Not Necessary to Ensure a Vibrant ivfarket/iJr Online ivfusic ...... 27 

C. The iRF A Would Exacerbale .Markel Dislortions. Reduce incenlives 10 

Creole Contenl, ,"'low innovalion, and Harm Consumers ................................. 36 

VI. SUMylARY AND POLICY RECOMMEKDATIONS .......................................................... 38 

t JettIey A. Eisenach is a Managing Director and Principal at Navigant Economics LLC, a 

Visiting Scholm at the American Enterprise Institute for Public Policy Research, and fir Adiunct 

Professor at George Mason University Law School. He serves all the Bomd of Directors of the 

TnrOTIllaLl0n Technology ancI Tnnovalion Foundalion, and on Lhc Board or AcIvisor~ or lhc Pe\~' 

Proj .. x:l on lhe Tnlo.:md ancI American Life. Th.: aulhor is gralerul lo Andrew Card ror research 

as~islam:e and lo lhe musicFTRST Coalilion ror financial supporl. The views exprel"'ised are 

exclusively those of the author 
87 

I. INTRODUCTION 

Until 1995, the principal protection afforded to holders of sound recording 

copyrights wcre rights of rcproduction and distribution. Thus, copyright holders 

of sOlmd recordings could monetize the copying and distribution of their 

recordings, but could not charge for "perfonnances," such as when radio stations 

played copyrighted music. In the absence of such a property right, naturally, 

there was no market for sound recording perforn1ances.! 

Beginning with passage of the Digital Perforn1ance Right in Sound 

Recordings Act ("DPRA") in 1995, Congress has moved gradually in the 

direction of both creating performance rights and putting in place the conditions 

to allow such rights to be traded at market (that is, economically eftlcient) rates. 

The first sound recording performance right. for certain digital performances. 

was created by DPRA, which also created a compulsory license for nonexempt. 

non-intcractivc, digital subscription transmissions. In 1998, Congrcss cxpandcd 

thc compulsory liccnsc to additional digital pcrformanccs in thc Digital 

Millennium Copyright Act ("DMCA"). As a result, for some rights, particularly 

"interactive" services, buyers and sellers bargain freely over rates and conditions. 

However, "non-interactive" services (ie, radio-like "streaming" services), may 

take advantage of a compulsory license: Buyers and sellers have the option of 

negotiating voluntary agreements (which is generally done on an industry-wide 

basis). but if they fail to do so, sellers are required to license rights at 

government-determined "statutory" rates. 

In this context, the criteria for setting statutory rates are obviously important. 

For most non-interactivc scrviccs. thc DMCA cstablishcd a "willing 

buycr/willing scllcr" ("WBWS") standard, which is intcndcd to sct ratcs at thc 

level that would have been reached in a voluntary, marketplace negotiation. In 

practice, as implemented by Copyright Arbitration Royalty Panels ("CARP") and 

later by the Copyright Royalty Board CCRE"), the WBWS standard has resulted 

in a market-oriented approach to setting rates. 

In adopting the WBWS standard, Congress chose to reject the previous, less 

market-oriented standard used in the DPRA, namely a four-part test under 

Section 801(b) of the 1976 Copyright Act. Unlike the WBWS standard, the 

lWl(b) approach requires regulators to take into account non-market based 

criteria in setting royalties for statutory licenses, including specifically to set rates 

so as to protect licensees against any "disruptive" effects that might be caused by 

paying royalties - no matter how market-oriented they may be. Thus, the lWl(b) 

standard arguably grants licensees a de facto right to perpetual profitability, 

allowing licensees to argue that they and their business models have a right to be 

protected from "disruption." In the dynamic world of online content delivery -

in which new and improved business models are constantly replacing old, 

obsolete ones - the creation of such a right has obvious negative consequences 

for innovation. 

Fortunately. the 801(b) standard currently applies to only a handful of 

companies, which were "grandfathered" when the DMCA was adopted. Thus. 

royalties for all other sound recording performance rights are established either 

through direct market negotiations among the parties or, for compulsory licenses. 

Here and elsewhere in this paper, 1 use the tenn "property right" in the colloquial sense, 

that is, as the right to right to exclude others limn using a good. 

2 
88 

THb SOLNuRbcoKlllNu PbRl>OKMANCb RlUHT AT ACKOSSKOAllS 

under the market-oriented WBWS standard. Moreover, in recent years, Congress 

has shown substantial interest in bringing the one significant remaining area in 

which property rights are lacking - over-the-air perfOTIllanCeS by terrestrial 

broadcasters - under a market-oriented framework, by extending the sound 

recording perfonnance right to such perfonnances. In short, the recent history of 

the sound recording perfonnance right has been clearly in the direction of a more 

market -oriented approach. 

In mid-20 12, however, legislation was introduced in both the House and 

Senate that would reverse the pro-market trend by replacing the WBWS standard 

with the less-market-oriented 80I(b) standard for the compulsory licenses for 

sound recording performances. The Internet Radio Fairness Act CIRFA") (HR. 

6480 in the House, S. 3609 in the Senate) - which is supported by some 

web casters (e.g., Pandora) - would require copyright judges to take into account 

whether market-based royalty rates might "disrupt" the business models of 

licensees. It goes without saying that the webcasters that support the bill expect 

the 801(b) approach would result in lower royalties than under the current 

market-based standard. 

The IRFA does not stop, however, at imposing the anti-disruption standard 

on future royalty proceedings. It contains a series of additional measures, all 

dcsigncd to tilt the institutional playing ficld to thc advantagc of webcastcrs, 

including prohibiting thc CRE from considering certain typcs of cvidcncc and 

forcing it to ignorc rclcvant prcccdcnts. As if to cnsurc that cconomics will play 

as small a role as possible in future CRE deliberations, the Act even removes the 

requirement that at least one of the three CRE judges have expertise in 

economics. 

As I explain below, the arguments offered in support of the IRFA - that it is 

necessary to ensure a vibrant market for digital music, or that it will "level the 

playing field" by subjecting all digital music distributors to the same copyright 

regime - are unfounded. The market for digital music is growing by leaps and 

bounds, and the rapid growth of online advertising and wireless broadband, 

ensure that it will continue to do so. Webcasters are not paying "unrcasonable" 

rates, and they are fully capable of paying market rates in the future. Moreover, 

imposing the 80I(b) standard on webcaster royalty proceedings would not 

address the most serious imbalances in the current royalty regime, including the 

fact that over-the-air broadcasts by terrestrial broadcasters continue to be exempt 

altogether from the sound recording perfOTIllanCe right 

l1le remainder of this paper is organized as follows. Section II presents a 

brief history of the sound recording perfonnance right. Section TTl reviews the 

implementation of the WBWS and 80I(b) standards by the CARP and the CRE, 

and explains why, in practice, the !Wl(b) standard is likely to result in belowmarket rates. Section IV explains why the rates established for non-interactive 

online music services under the WBWS standard are both etIicient and 

'-rcasonable," and details thc harm to innovation, compctition and consumcrs that 

would result from adoption of the 801(b) standard for all statutory royalty 

proceedings. Section V presents a brief summary and offers a few concluding 

thoughts. Specifically, it recommends that Congress return to the marketoriented path it started down in the I 990s, beginning with extending the sound 

perfornl<ll1Ce right to terrestrial radio. 

3 
89 

II. Trm SOUND RECORDING PERTORMANCE RIGHT: A BRIEI' HISTORY 

Under Section 102 of the Copyright Act of 1976, there are two types of 

copyrights associated with recorded music 2 Thc fust copyright protects the 

musical composition (consisting of the notes and lyrics) written by the 

composer3 TIlis "musical work" copyright is typically held by a music 

publisher4 TIle second type of copyright protects subsequent recordings of a 

given song by a particular artist' n1is "sound recording" copyright is typically 

held by the producer ofthe sound recording, 1110st often a record labeL" 

Prior to 1995, there was an important distinction between the rights enjoyed 

by the owners of a musical work copyright and a sound recording copyright. The 

owner of a musical work copyright was also granted a "performance right" 

which entitled her to compensation whenever her copyrighted work was 

performed or broadcast publicly7 The owners of sound recording copyrights. 

however, were not granted a performancc rightS For example, whcn a mdio 

station publicly broadcasts a song ovcr the air, it pays a royalty to the holder of 

the musical work copyright, but not to the holder of the sound recording 

copyright." TIle principal protection afforded to o\vners of sound recording 

copyrights was a reproduction and distribution right, which granted 

See e.g., Library of Congress, Copyright Rovalty Judges, Digital Peifumwnce Righi in 

Sound Recordings and Ephemeral Recordings, Final Rule and Order, 72 FR 24084 (May I. 2007) 

(hereafter Webcaster II) 3 Id 

See Kimberly L Craft, "The Webcasting Music Revolution Is Ready to Begin, as Soon as 

We Figure out the Copyright Law: The Story of the Music Industry at War with ltsell~" iiastings 

Communications & Hntertaimnent Law Journal 24: I (2001) 1-42 at 4 (hereafter Cra/i 2001). 

, See Webcaster II at 24086. ("The term 'musical work' reters to the notes and lyrics of a 

song, while a 'sound recording' results tiOln 'the fixation ofa series ofrllusical, spoken or other 

sOlUrds. A song that is SlUIg and recorded will constitute a sound recording by the entity that records 

the perfnnnance, and a musical work by the song-vvritcr.")' See uLw) Blian Day., "The Super Bruwl: 

The History and I' utme of the SOlmd Recording Perfonnance Right," I'viichigan 

Telecommunications and Technology Law Review. 16 (2009) 179-212 at 183 ("Smmd recording 

copyrights, on the other hand, are nomlally owned by the artist or record label and protect the 

originality ofthe recording itself as distinct from the lUlderlying written lyrics or melody.") 

6 See Webcaster 11 at 24086 CTypically, a record label owns the copyright in a SOlUld 

recording and a music publisher owns the copyright in a musical work") (citations omitted). 

7 See Craft 2001 at 4 ("If a performance of the musical work happens to be broadcast oyer 

the airwaves such as by a radio station, each play is also worth monev, in the form of royalties, to 

Lhe songwriLer and puhlishC-'T.")' See also kremy DcliheTO, ""CopyrighL ArhiLraLion Royally Pands 

and the Wehcasting Controversy: The Antithesis of Good Altemative Dispute Resolution," 

Pepperdine Dispute Resolution Law Joun1al 5: 1 (2005) 83-114 at 85 (hereafter Delibero 2005) 

C-Within the Copyright Act, [musical] copyright owners enjoy an exclusive right of public 

perfonnance. The copyright m,"ler may recover royalties anytime a third party publicly perfonns 

the work A pubhc perfomlance includes both the musical work and the sound recording .... Unlike 

musical works, the owner of a somad recording (usually a record label) is not automatically entitled 

to performance royalties under tl,e Copyright Act"). 

8 See Wehcaster II aL 240S6 ("'The perf'onuance righL is wan Led Lo an categories of' 

copyrighled works with onc cxcLllt1on: Sound recordings. TIlliS, while lhe own •. T oC a mut'iical work 

enjoys the perfonnance right, the owner of a smmd recording docs not") 

" See Craft 2001 at 6 ("'Vv'hile radio broadcasters pay royalties to publishers and writers tor 

use of the musical work, they have, however, never had to pay any sort of royalty or licensing fee 

to the actual record companies for use of the sound recording."). See also Intercollegiate Broadcast 

System, inc., et ai, 1'. Copyright Royalty JJoard, 574 F.3d 748, 753 ( D.C. Cir. 2009) Cn,e 

copyright owners of musical works, but not those of solUld recordings, have long enjoyed exclusive 

rights to public perfonnances of their works.") (herealter Web caster II Circuit Opinion). 

4 
90 

THb SOLNuRbcoKlllNu PbRl>OKMANCb RlUHT AT ACKOSSKOAllS 

compensation for the physical reproduction and sale of sound recordings (and 

prevented the unauthorized reproduction and distribution of recordings)lO 111is 

reproduction right was beneficial to sound recording copyright owners prior to 

the 1990s, when recorded songs were primarily disseminated to consumers via 

the sale of physical records or CDS.ll Broadcasters also argued that no 

performance right was necessary because radio airplay helped to promote the 

sales of sound recordings12 

A. The Digital Performance Right~ Act 

In thc 1990s, thc cmcrgcncc of digital communications tcchnologics and thc 

growth of the Internet dramatically altered the music landscape. 13 In addition to 

purchasing cassettes or CDs, or tuning into AM/FM radio, listeners could access 

music via digital satellite transmissions, Internet radio ("webcasters') or cable 

music services. 14 As digitally broadcast music began to take root, record labels, 

backed by both the Copyright Office and the Patent and Trademark Office, 

argued that the prevailing copyright structure would not adequately compensate 

mvners of sound recording copyrights15 Congress was concerned that "certain 

types of subscription and interactivc audio scrviccs might advcrsely affcct sales 

of sOlmd rccordings and crodc copyright owners' ability to control and bc paid 

for use of their work," as well as about thc potcntial for furthcr crosion in thc 

future from "pay-per-listen, audio-on-demand, or 'dial-up' services for a 

particular recording or artist" (the so-called "celestial jukebox")16 In response to 

these concerns, Congress enacted the Digital PerfoTInance Right in Sound 

Recordings Act in 199517 

TIle DPRA granted the owners of sound recordings a right to compensation 

for performances of copyrighted works broadcast "by means of a digital audio 

transmission," often referred to as the ""digital performance right."I~ 'Terrestrial" 

broadcasters (like AM and FM radio stations) that simulcast transmissions over 

the Internet were exempt. Non-subscription (ad-supported) services did not exist 

at the time. 

Whilc DPRA requircd digital music scrviccs to compcnsatc copyright 

holders, it treated interactive services and non-interactive services very 

10 See SonndRecording Act of 1971, Pub. L 92-l¥), 8') St.1!. 391 (l97l). 

]] See Craft 2001 at 5-6 ("Traditionally, the record companies have made money by selling 

copies of the sound recording, in form of vinyl alblllns, and later cassette tapes and CDs.111e 

record companies then pay the musical artist a percentage of these sales (i.e., the artist's 

royalties)."). 

12 See e.g., Day 2009 at 184. 

13 See Delihero 2005 at 86-87 

j.] Jd. See also Feldar Haher. "CopyrighL' in the Stream: The Battle on Weheasting." Santa 

Clara Computer & High Technology Law Jou17lal 28:4 (2012) 769-813 at 773 ("Wchcasting is a 

digital transmission of creative work over a network that results in the playing of the work, without 

storing a pennanent copy at the recipient's end.. Put simply, webcasting is listening to music or 

watching a video in 'real time,' instead of downloading a file and viewing or listening to it after the 

dowliloading is complete or at any other time."). 

15 See U.S. Senate, Cormnittee on the Judiciary, Digital Pe~/um"'nce Right in Suund 

Records Act uf 1995 (Report 104-128, August 4.1995) at 11-15 (hereafterDPR4 Senate Repurt). 

16 Jd., at 15 

Puhlic Law 104-39. 109 Slal 336 (1995). 

See Reefhovel1.com TI,C v. Uhrmian of Con g.. 394 F.3d 939.942 (D.C. CiT. 2005)~ see 

also Wehcaster II Circuit Opinion at 753 arld Webcaster II at 24086 

5 
91 

differently.19 Because interactive services provide the ability to listen to a given 

song "on demand," thus obviating the need to purchase a physical copy of a 

sound recording, they arguably pose a more potent threat to music sales than noninteractive services (which are more akin to radio)20 Thus, Congress established 

an exclusive copyright for interactive services, allowing rights holders to 

negotiate freely in the market for such rights 21 

For non-interactive services (i.e .. radio services or "webcasters"), on the 

other hand, DPRA created a compulsory license granting users full access to 

record companies' libraries of sound recordings. 22 Royalty rates could still be 

voluntarily negotiated by the parties, but if they failed to agree, rates were set 

through binding arbitration by a Copyright Arbitration Royalty Panel convened 

by the Librarian of Congress, subject to his review and a right to appeal to the 

D.C. Circuit Court of Appeals23 

Notably for our purposes, DPRA borrowed the substantive criteria for 

arbitrated royalty rates from a pre-existing four-part standard found in section 

801 (b)( I) of the Copyright Act of 1976. Specifically, 801 (b)( I) requires tllat 

royalty rates achieve four objectives: 

(A) Maximizing the availability of creative works to the public; 

(B) Affording copyright owncrs a fair rcturn for thcir crcativc 

work and a fair incomc lmdcr cxisting cconomic conditions; 

(C) Reflecting the relative roles of the copyright owner and the 

copyright user in the product made available to the public with 

respect to relative creative contribution, technological 

contribution, capital investment, cost, risk, and contribution to 

the opening of new markets for creative expression and media; 

(D) Minimizing any disruptive impact on the structure of the 

industries involved."' 

As discussed below, the first three criteria, standing alone, imply a standard 

that is similar to tile market-based WBWS standard. However, the fourth 

criterion, requiring "non-disruption," reflects a departure from the principle of 

19 See Mall Jackson, "'From Broadeasllo Weheasl: Copyrighl Law and Slreaming Media," 

Texas Intellectual Property Law Joumal 11 (2003) 447-498 at 456 (hereafter Jackson 2003) 

211 Id 21 Id See also Day 2009 at 185 

22 See AnlY Duvall, -'Royalty Rate-Setting for \Vebcasters' A Royal(ty) Mess," ]'viichigan 

1'elecommunications Technology Lml' Review 15 (200g) 267-295 at 270, n. 20 ('"The statutory 

license is compulsory because the user of the copyrighted work need not get individual permission 

limn the copyright holder; their permission is automatically given if the user complies with the 

requiremenls of the slalule.") (hereaf\er Duvall 2008). The requiremenls of the slliluloT)' licenses 

included limiLaLionl"i on the numhLT oC songs hy a single arlit'il or fTom a single alhum lhal could he 

played per hour, as well as a prohihition on releasing an advance playlist of upcoming songs. Id at 

271 

Id. at 271 

2.:1 17 V.S.C 801(b)(l) See also Copyright Royalty Board, Library of Congress, 

Determination C!lRates and Termsfor Preexisting Subscription SeJ1'ices and Satellite Dif(ital Audio 

Radio Sen'ices: Nnal Rule and Order, 73 FR 4080 (January 24, 200g) at 4082 (hereal1er SlJARS 

I). 

6 
92 

THb SOLNuRbcoKlllNu PbRl>OKMANCb RlUHT AT ACKOSSKOAllS 

market-based rates in favor of protecting licensees from potentially "disruptive" 

changes in royalties. Today, only a handful of services remain subject to this 

anachronistic standard. 

B. The Digital Millennium Copyright Act 

The years immediately following passage of the DPRA saw the emergence of 

the Internet and the rapid growth of "streaming radio." These new services were 

gcncrally non-intcractivc and non-subscription, relying on advcrtising for 

rcvcnuc. Bccausc advcrtising-supportcd scrviccs wcrc not in cxistcncc at thc 

timc DPRA was passcd, thcy wcrc not covcrcd by its compulsory liccnsc 25 In 

1998, Congress addressed this oversight by expanding the scope of the 

compulsory license as part of the Digital Millennium Copyright Act 

("DMCA,,)2(i TIle DMCA offered these new non-interactive services the benefit 

of a statutory license (rather than requiring these services to negotiate licenses 

with individual sound recording copyright owners)27 

The DMCA divided non-interactive digital audio services into two groups. 

The first group consisted of FCC-licensed satellite digital audio services 

(SDARS) that existcd prior to July 31, 1998 (i.c., satcllitc radio companics Sirius 

and XM) and thrcc subscription scrviccs: DMX, Music Choicc and Muzak 

(callcd Prc-Existing Subscription Scrviccs, or PSS)2S Undcr thc DMCA, PSS and 

SDARS were "grandfathered" under the 80 l(b)( I) standard, under the theory that 

they had relied on the standard at the time. 

TIle second group consisted of "new" digital subscription services and 

services maldng "eligible non-subscription transmissions," which included 

Internet-onlv radio webcasters like Pandora and simulcasts of over-the-air 

broadcasts.29 For these services, in the absence of a voluntary agreement benveen 

copyright holders and the webcasters, the DMCA directed that the rates for 

25 See Day 2009 at 187. See also Jackson 2003 at 457 CAt the time the rDPRAl was 

"Titten, webcasting was a nascent technology. By 1998, webcasting had proh±emted with hundreds 

of radio stations and webcasters streaming music on the Intemet. As Congress prepared to pass the 

Digital Millennium Copyright Act, the RTAA successrully lohhied to insert language 10 the 

provisions or the DPRA 10 close the 'loophole' lhal prevenled lh"TIl rrom lic""1lsing nonsubscription wcocast performances.''). See fi,rlher Craft 2001 at 12 ("Thc ncw tcclmology. along 

with its various Internet applications, spread quickly. Suddenly, online-only weocasters were 

streaming digital music over the Internet not merely on the envisioned subscription basis like 

satellite and cable companies, but also on a non-subscription basis by means of paid 

advertisenlents, like ordinary mdio progranllning.~'). 

26 See Webcmter II at 24086. 

21 See Craft 2001 at 15 C"111is license ,vould ease the burden of having to locate and pay all 

of the individual record companies that held the sound recording copyrights to the various musical 

sdections lransmilled ... "). 

28 See SDARS J at 40RO. n. -' ("Section 114(j)(11) or the Copyright Act defines the lcrm 

'preexisting suhscription service' to mean 'a service that pcrfOTIllS SOlIDd recordings by means of 

noninteractive audio-only suhscription digital audio transmissions, which was in existence and was 

making such transmissions to the public for a fee on or before July 31, 1998 ... "). DMX was 

subsequently liquidated and its assets purchased by another company, and therefore lost its 

"grandfathered" status. 

29 See Duvall 2008 at 272 ("The Digital Millennium Copyright Act (DMCA) addressed 

royalty payments for webcasters under Section 114. The DMCA adopted the statutory license illr 

l\vo types or wehcasting: 'preexisling suhscriplion services' and 'eligihle non-suhscriplion 

sLTvices.' These lwo cat..:gories included l..:rrestrial radio slalions' online rehroadcasts as well as 

pure wehca..-;krs. hut excluded provid("Ts who allowed users lo do\vnload or sekct music or lh..:ir 

choice.") 

7 
93 

statutory licenses and royalties should be set by the CARP to "represent the rates 

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

buyer and a willing seller"" (the '\villing buyer/willing seller" standard, or 'WBWS,,).10 

As discussed further below, Congress has intervened directly in the setting of 

webcaster royalties twice since passage of the DMCA, both times by passing 

legislation favorable to webcasters. In 2002, it passed the Small Webcasters 

Settlement Act of 2002, which "encouraged" record labels to negotiate lower 

rates with small webcasters than had been set by the CARP in the Webcaster 1 

proceeding. Then, in 2008 and 2009, it passed (and then extended) the 

Webcaster Settlement Act, which again "encouraged" rights holders to negotiate 

lower royalty rates, this time offering all webcasters a discount from the rates set 

by the CRE in its 2007 Webcaster 11 decision 31 

Notably, neither the DPRA nor the DMCA extended the sound perfonnance 

rights to tlle most prolific users of sound recordings, terrestrial radio stations. 

However, in the late 2000's, Congress considered adopting legislation, the 

Performance Rights Act of 2007 (H.R. 47S9/S. 2500) and its successor, the 

Performance Rights Act of 2009 (H.R. 848/S. 379), which would have extended 

the sound recording right to terrestrial radio, established a compulsory license for 

tcrrestrial radio stations, and adopted a single "fair market valuc" standard for all 

tcrrestrial broadcasters, cable, satellite and Internet services. Specifically, as 

passed by both the House and Senate Judiciary C011l11littees, Section 2 of thc 

Perfonnance Rights Act instructed the CRE to establish statutory rates under tlle 

first three prongs of Section 801(b)(1), but rejected Section 801(b)(1)(D), the 

non-disruption standard 32 Based on CRB precedent, the first three prongs of the 

80 I (b)(1) establish a market -based standard which is similar, if not identical, to 

the WBWS standard. Thus, the Performance Rights Act would thus have created 

See 17USC. § 114(lj(l) (pre-existing services) and 17USC. §114(f)(2) (eligible nonsubscription services and new subscription services). With respect to the ,VD\VS standard. 

Congress directed that several considerations be taken into accOlUlI. See 17 US.c. § 114(fX2)(B) 

Cln detennining such rates and tenlls, the copyright arbitration royalty panel shall base its decision 

on economic, competitive, and progranuning infonnation presented by the parties including (i) 

whether use of the service may substitute for or mav promote the sales of phonorecords or 

otherwise may interfere \v1lh or may enhance the sound record copyright owner's other streams or revenue from its sounu rcc()rdings~ and (ii) the rdaliv~ TOleS or the copyright OWTILT 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"); and C011l1uittee on the Judiciary, US. IIouse of Representatives, Section-by-Section 

Analysis ofII.R. 2281 (105th Congress, 2d Session, September 1998) at 57-59. 31 In addition, in 2004, Congress passed the Copyright Royalty and Distribution Refoll11 

Act, (CRDRi\) (Public Law 108-419), which implemented procedural changes tavored by 

webcasters. Among other changes, the law replaced the ad hoc CARP panels with a threeciudge 

Copyright Royalty Board. See e.g., Congressional Record 150;26 (March 3, 2004 at h762-h772 

(availahle al hUn:l!capilolwdnls.org!uak.i2004/03I03lf--T762 copyr1ghl-Jo\'all\t-and-dl~lrihuiinnf"rOTIu_-aci-or-2i). See also Rohin .lewd"r. The Copyright Royalty and Distrihutiol1 Ref 01711 Act of 

2005. Congr"ssiorutl Research Service (2004) (availahk at 

http://www.ipmall.into/hostedJesources/crsIRS21512_041216.pdf). 

32 Sec e.g., Committee on th" .Tudiei;rry, Peljol1llQnCe Right, Act (HR. 848) Rl."port 111-6RO 

(December 14,2010) at 14 ("The section further establishes rate standard parity among terrestrial 

broadcasters, cable, satellite, and Internet services, by creating one rate standard for Copyright 

Royalty Judges (ClUs) to consider, regardless of the platloml involved. The new standard will be 

the old 8Ul(b) standard minus subpart (D) .... ") (available at http://www.gpo.gov/fdsys/pkg/CRPT1 1 Ihrpt680/pdf/CRPT-l1 Ihrpt680.pdt) 
94 

a level playing field for all users of sOlmd perfoTInance rights with rates set either 

through voluntal)' ncgotiations or, whcrc ncccssal)', through a statutoI)' liccnsc 

based on a market-based standard. 

III. TIm SOUND RECORDING PERFORMANCr: RIGm IN PRACTICE 

Since passage of the DPRA and DMCA, sound recording perfoTInance 

copyright holders and licensees have engaged in multiple rounds of negotiations 

ovcr digital performance royalties, sometimes arriving at voluntary agreements, 

but more commonly settling rates through litigated proceedings before the CARP 

and its successor, the CRB33 

Since 1998, there have been three full-blown copyright royalty proceedings 

for uon-pre-existing digital music services uuder the WBWS standard (known as 

Wehcasler 1, Wehcaster 11, and Wehcasler III); in addition, as noted above, there 

have been two direct statutory interventions, the Small Webcaster Settlement Act 

of2002 and the Webcaster Settlement Acts of 2008 and 2009. As detailed in the 

first subsection below, the fonnal proceedings have involved extensive economic 

analysis, supported by literally dozens of industl)' and economic experts, with 

multiple layers of administrative and judicial review. \\-bile the results of these 

proceedings have in many regards favored webeasters, webcasters have 

nevertheless succeeded on more than one occasion in lobbying Congress to 

intervene in the process in favor of still lower rates. Thus the IRF A is merely the 

latest in a string of efforts by webcasters to have royalties set at below-market 

rates. 

In addition to the three Wehcaster proceedings, there havc been two fomlal 

proceedings (PSS 1 and SDARS I) to set rates for PSS and SDARS, and a second 

(SDARS II) is U11derway. Rates in these proceedings have been set under the 

801 (b) standard and, as discussed in the second subsection below, demonstrate 

that the 801 (b) standard has resulted in rates below markct-based levels. 

Table 1 presents a brief summaI)' of the primary Wehcasler and SDARS 

proceedings 34 

11 Tn the meantime, of course, rights holders have also negotiated voluntary agreements \\lith 

online interactive services, such as Spotit'Y. As discussed below, these voluntarily negotiated rates 

have been used by the Copyright Royalty Board as the basis for setting compulsory license rates 

34 The following review addresses the central issues in these proceedings and for copyright 

policy going fOf\\..'ard, namely the terms and level of royalty rates for the primary sound 

performance right at issue. Each proceeding has also addressed a variety of ancillary issues, such 

as the rates for "ephemeral" recordings (which are digital copies made for the purpose of 

facilitating online music distribution). minimum fees applicable to smaller webcasters, the division 

of certain proceeds between studios and artists, and so forth No effort is made here to present a 

complete or comprehensive treatment of these ancillary issues 

9 
95 

G,wl'min(: 

Ternl Stan liard 

l'i'AI·200S" WBWS 

2006·2010 WBWS 

2006-201 5 wews 

2011·101.5 WBWS 

199(..2001l SOJ(b) 

2007·11H l KlII (b) 

20 13·20 17 W l(b) 

.... . ... /,- o;.-..... 

TAm.!":: I : 

SE.l.cCruD RATE PROCEEDlNGS. 1998·1012 

D""i io n Ap ",~1 

Proo:ccdin!:l Dal~ CU"'I) el~ 

N,,,,·/,,":rild;,·c S~,,· c.:s 

1Vclx::t';ler I Feb, 2001 Jan. 2005 

Wc:ocaSlcr II Mny 21107 J'1l. 2009 

Wclx:asler 

setllclIlCnl Act Jul. 2Ik)'} w" 

Pun:plaj Rat<"S 

Wcbca>lcr m Mar. lO ll ," 

PSS J May J'J'JII Mil) J'JY') 

SDARS 1 Jun. 2(~18 Jul. lOO,) 

SDARS II Ongoing nla 

in~1 I~luIOI)' 

Ra il' 

0-07e 8· Ik )2) 

IJ.(J:5c (2006) -

0.191' (20 10) 

Grcalcr or 2S%or 

n:1'eIlUC:S or O,Oilc 

p(Ml6) ~ 

iU'\c (2015\ 

0.1<)1' (20 11 ) -

O.2Jc (20 ) 

6% (2007)-

!t% (2012) 

," 

RIl 31t~ 

Melric 

Per· 

pcrfonn:mc:c 

Per· 

pc rfo m~1'lCe 

p". 

pcrfOnllanc:c 

Per· 

pcrfomclJlCc 

Pe roenlage 

i>f gross 

f"C\'CllUC 

Pcn:cn~ gc 

orgros§ 

re>·c .... 1l' 

"'" 

As noted above. thcr\: have ix'Cll th rec full-bioI," ratc prtlCt-.:dings 10 

cstabl 15h rates fo r Imemcl-Qnly \\,C!x:;tsICIS and SII"UIC:OSICIS sillcc 1998. Each 

time, the ::Idj ud'c:lling body (filSt a CA Rl', then the CRB) held extensive 

hearings. Took t~ nl r frum numerollS expert econonli c :U1d industry wil/lcsses. 

engaged in full bn nns schedules. and issued a wnlien dCclsion cxplaiIlllJg the 

basis for the resulting ratcs: and. each dedsion has been subj ect To appcru before 

the D,C. Circuit. Ne,·c rthcleSl;. C:lch dec isiouhas led 10 complaints ~ 

lI eocaslcrs, \I ho have lobbied Congress to micn 'Cnc and $t1 lo\\ er r;l1~S. Indced. 

most webcaste rs today arc pa) ing royalty r.ucs negotiated PUISII:Ul! to the 

Wchca5tn Scttlcment Act of 1009. which arc below the marl.:CI-b."lSCd r.ucs 

... NOO-$\l\l.,:ripli.,., ......... a$lllll! 1111<1 Ibr tm ·1i)().2 "~re II", n!. uh " r lhe I(',k".,. .... I 

pr"" ... hn . & . 67 I'll. Hl-lO (July ) (Mffi rmrd,n 8 .. 11",,,,,,",'''''''' 1.,I/mJ,,"" Q/C""gn-... . 

:w~ f 3~ ?,W m ,c (;,. :!j105») 1U1le$ f<)r '101~ lllw-''I'\ Oll ".I>. ... !I"'S fuo 2OI)J ~. _ad "'1'" r ... 

MrIt.o>;ril"i/)\1 ''''/>'''I-''i''8 for t9')!I·21 ioI . 'Wfl< ""01"11 ." .o(j ~ I'll. 2n41 ("lor I, 200,); A~~ "l .... 1\8 

.11. Z1~ (Mor zn . 211 '] ~ 68 f R SlJ ,4<)~ (Aug, 21 , (}II3 . 69 I II. ~JJ (l'eb . ~1 14 : . , IN II. 

SIC: (Feb. 26. XII ... ). R. ,e, firr 201'15 "."" lho: .,,"utl "1'.,, exl.:"""", of lhe: :Jr. >! ,. Ie' in t~" 

CW)riShl Royalty a"d Dr""""I;"" Rct;"'"r A.1 s... roo L. N" 10/1·4 19 J ('( b)() ; 7n FR 1'>736 

(I'.b 8 . .xK>S) (Ierm,n, hng p<l'Oli'\l! fl'",,"~il in l!'. 

10 
96 

established by the CRE in the Webcaster II proceeding. This subsection 

describes the process by which webeaster rates have been established since 199X. 

1. Wehcaster / 

The Webeaster I proceeding began on November 27, 1998, after a six-month 

voluntary negotiation period between ,Yebeastcrs and the RIAA resulted in a 

number of agreements between individual webeasters and the record companies, 

but failed to produce an industry-wide agreement36 In accordance with the 

DMCA. a CARP was convened to establish the rates and temlS for a statuto!)' 

license. Its report, recommending royalty rates for the period from October lX, 

1998 through December 31, 2002, was released more than three ycars later, on 

February 20, 2002 37 

The CARP proceeding was extensive by any standard. It included a full cycle 

of direct and rebuttal tcstimony, with 49 economic and industry expert witnesses 

presenting direct testimony and 26 on rebuttal, as well as oral arguments and 

multiple rounds of briefs 38 The resulting record was "one of the most 

vohmlinous records in CARP histo!)'," including a written transcript of over 

15,000 pages, many thousands of pages of exhibits, and over 1,000 pages of posthearing submissions" by eounsel 39 

In reaching its decision, the CARP grappled with and resolved a number of 

highly technical legal and economic questions, many of which were resolved in 

tavor of webeastcrs. For example, under the statute, the CARP concluded that 

the WBWS standard was created to set rates and tenns "that would have been 

negotiated" been a willing buyer and a willing seller in a "hypothetical 

marketplace" in which no compulso!)' licenses existed and rates were detemlined 

by negotiations benveen music services and copyright holders."11 While the 

parties agrccd that thc willing "buycrs" in this contcxt wcrc non-interaetivc 

digital music services, they disagreed as to the identities of the hypothetical 

"sellers. ,,41 

TI1C RIAA, rcprescnting the intcrcsts of thc copyright holders (i.e., record 

companics), assertcd that thc scller in the hypothctical marketplacc should 

consist of "a single collective of sound recording copyright owners (such as 

RIAA), offering a blanket license" for access to the sound record libraries of its 

1ti See United States Cop)'right Oilic.:, Library or Congn:ss, Determination afReasonable 

Rale5 and Terms for the Digital PClformance f?f SOllnd Recordings and F.phemeral Recordings: 

Final Rule. 67 FR 45240 (July R, 2(02) at 45241 (hereatter Wehcaster TJ CThese proceedings 

began 011 November 27, 199R, 'when the Copyright Office announced a six-month voluntary 

negotiation period to set rates and terms for the webcasting license and the ephemeral recording 

license for the first license period covering October 2R, 199R-December :;1. 2000. 63 FR 6555 

(November 27. 199R). During thi s period, the parties negotiated a number of private agreements in 

the marketplace, but no industry-,vide agreement \-vas reached. Consequently, in accordance ,vith 

the procedural requirements, the Recording Industry Association of America, Inc. ("RIA A "") 

petitioned the Copyright Office on July 23, 1999, to commence a CARP proceeding to set the rates 

and terms for these licenses.") 

3' See United States Copyright Office, Library of Congress ,III the Matter orRate SettillJ',for 

DiRital Perfcwmance RiRht in Sound Recording') alld Ephemeral Recording<;, Report '-?f the 

CopyriJ',ht Arbitration Royal,v Panel. (February 20, 2(02) (hereafter ]00] C4RP Report) 

38 Id. at 11-15 

39 Id.. at 18 

40 Id.. at 21 41 Id 

11 
97 

IEFFREY A 1',T~El\AC;H 

members42 TIle music services, in contrast, argued that in a hypothetical 

markctplacc wherc compulsory liecnscs did not cxist, a single RIAA-likc cntity 

could not negotiate on record companies' behalf, because the antitrust exemption 

granted to RIAA that allowed it to bargain on behalf of the collective was 

conditional on the compulsory nature of the licenses at issue 43 The services 

contcndcd that a single RIAA-likc cntity in the hypothctical markctplaee would 

wield market power sufficient to distort negotiations."4 Instead, the services 

proposed that the "sellers" in the WBWS market be comprised of a "non-trivial 

nwnber" of smaller collectives, offering blanket licenses in competition with one 

another. 45 Ultimately, the CARP rejected both proposals, concluding instead that 

the appropriate "sellers" in the hypothetical marketplace were neither a single 

collective nor a number of smaller collectives. but rather individual record 

companies, offering blanket licenses for each company's particular repertory of 

sound rccordings 46 From thc perspcctivc of thc webcastcrs, this was a highly 

favorable result, as it meant that rates were based on the assumption that all 

copyright owners were competing against one another in the marketplace rather 

than being represented jointly by bargaining agents. 

In addition, the CARP concludcd that the WBWS standard did not 

necessitate any ex post adjustments of the royalty rates it determined based on the 

"additional factors" enumerated in Section 114(t)(2)(B), finding that these factors 

would already be "fully reflected in any agreements actually negotiated between 

vyebcasters and copyright OVv11crs in the relevant marketplacc ... 47 

In the course of this extensive proceeding, RIAA and the music services 

presented competing proposals for determining royalty rates, each backed by 

expert testimony. RIAA proposed basing rates on the agreements negotiated 

between the RIAA and 26 separate webcasters during the voluntary bargaining 

pcriod, 4< noting that those agreements involved "the samc buyer, the samc scller, 

the same right, the same copyrighted works. the same time period, and the same 

~12 Id.. al21-22. 

13 Id.. al 23 ("We recogniLe lhal the hypolhetical markelplace we sed. lo replicate would 

operate more ellicientl)" 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 

negotiations were non-exdusive. Congress dearly perceived antitrust concerns with such an 

arrangement. Congress authoriLed antitrust exemptions respecting such negotiations on(v within the 

context of compulsory licenses.") (emphasis in original). 

11 Td.. at 22 ("The Services' perception of the sellers. in the hypothetical marketplace 

envisaged hy Congress. is starkly different. They assert that RTAA's vision 'would eviscerate the 

protections sought hy the Justice Department and implemented hy Congress to prevent the exercise 

of market power [by the RTAA or the record companies]. ... ) 

" Td. 

Td.. at 44 CWe concluded above that the. hypothetical marketplace is one where the 

huyers are DMCA-compliant services. the sellers are record companies, and the product heing sold 

consists ofhlanket licenses for each record company's repertoT)" of sound recordings.")' 

4' Id.. at 35 (empha sis in original) 

48 Id.. at 2G, 38 CThe 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 vie,vpoints. RIAA argues that the best available 

evidence of the rate which willing buyers and ,villing sellers would agree to can be found in the 2G 

agreements it actually negotiated with the licensees for the rights in question. The Services. on the 

other hand, contend that these agreements are fatally tainted in numerous respects and that ,villing 

buyer/willing seller rates are best derived from the thoughtful, theoretical model developed and 

explicated by Dr. Adam Jaffe. a distinguished economis!.") 

12 
98 

medium as those in the marketplace that the CARP must replicate. ,,49 

Webcastcrs, on the other hand, proposed rates derived from a theoretical model 

which attempted to estimate appropriate royalty rates for the sound recording 

right based on rates for musical work performance rights established between 

music publishers and over-the-air-radio broadcasters so 

The CARP ultimately decided that the webeasters' theoretical model was 

unreliable, in part because of intrinsic differences between the musical work 

performance right and the sound recording performance rightS! Moreover, it 

concluded, 'lhe quest to derive rates which would have been negotiated in the 

hypothetical willing buyer/willing seller marketplace is best based on a revie\v of 

actual marketplace agreements, if they involve comparable rights and comparable 

circumstances. ,,52 Taking multiple factors into account, the CARP concluded 

that while 25 of the 26 agreements that had been negotiated by RIAA were 

-'unreliable benchmarks,,,'3 the freely negotiated agreement with Yahoo! ,vas 

"evidence of an entirely different character, ,,54 reflecting "a truly arms-length 

bargaining process on a level playing field between two major players of 

comparable skill, size, and economic power. ,," Thus, based largely on the 

Yahoo! agreement, the CARP set a statutory perfOTInance royalty rate of O.14¢ 

per performance for Internet -only ("10") webeasters. 

In adopting the per performance rate structure, the CARP rejected arguments 

that it should set rates as a percentage of licensees' revenues. It fomld that the 

per-performance structure was superior because (I) a per-performance metric is 

directly reflective of the right being licensed; (2) pereentage-of-revenue models 

are difficult to implement because relevant webeaster revenues are complex: and, 

(3) many webeasters are small and do not generate much revenue, so that the 

adoption of a pereent-of-revenue model could result in copyright oVvl1ers 

receiving little or no compensation for the use of their materialS6 

The CARP also grappled with the issue of whether webeasters promoted 

music sales, especially in the context of radio retransmissions (i.e., copyrighted 

material contained in Intemet retransmissions of broadcast radio signals). Based 

on "undisputed testimony that traditional over-the-air radio play has a 

19 Id. 

50 Id. at 28 ("Accordingly, \Vebcaslers calculated their proposed per-performance and perhour sound recording perlormance fee by exlrapolalion IrOln the aggregale lees paid lo ASCAP. 

DMI_ and SESAC by over-lhe-air radio slalimlS holding blankel perl(lfInance licenses."). 

"Id. al 40 ("The Panel is uncomiorlable wilh many of lhese assumplions and lhe 

cumulative dIed casts signilicant doubt on the reliability of the ultimate conclusions. The Panel 

finds that thi s theoretical construct suffers serious deficiencies."-) 

<;2 Td. at 43 

'1 

Td. at 60 

Td. at 60 

"') Td. at 61 See also Duvall 2008 at 273-274 ("To determine the rates that would have been 

negotiated in the marketplace under the per perf()[1l1ance model. CARP revie\ved actual royalty 

agreements to comply ,vith its statutory obligations under the DMCA. Tt found that the 

RTAA/Yahoo! agreement provided an appropriate benchmark for the rate-setting because it ,vas the 

only RIAA-negotiated agreement 'to retlect a truly arms-length bargaining process on a level 

playing field behveen hvo major players of comparable skill, size, and economic p(Hver."") 

56 See 2002 CARP Report at 36-37. The CARP also recommended a minimum royalty fee 

of $500 per annum. Id., at 95 ("The Panel concurs with the Services that one purpose of the 

minimum fee is to protect against a situation in ,vhich the licensee· s perf()rmances are such that it 

costs the license administrator more to administer the license than it would receive in royalties 

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.") (emphasis in 

original) 

13 
99 

IEFFREY A 1',T~El\AC;H 

tremendous promotional impact on phonorecord sales," and the lack of any basis 

in the record for concluding that thc impact of Intemct simulcasts ,vas any Icss 

significant57 the CARP set a (lower) Radio Retransmission (or "RR") rate of 

0.07C 58 

As provided for under the DPRA, the CARP's findings were reviewed by the 

Register of Copyrights and the Librarian of Congress CLOC"). In its Final Rulc 

and Order, released on July 8, 2002,59 the LOC - after reviewing briefs filed by 

both sides - upheld the CARP's determination regarding the definition of the 

participants in the relevant hypothetical marketplace,oo but ruled that the CARP 

erred in setting a higher royalty rates for Intemet-only ,vebcasters than for radio 

retransmissions 61 While the LOC accepted that the R1AA"s agreements with 

webeasters served as a more reasonable benchmark than the webeasters' 

proposed "theoretical model," it lowered the 10 webeasting rate from 0.14¢ perpelionnance to O.07¢ per-perfonnanee6~ (to match the royalty rate tor RR 

entities) 63 Thus, the LOC cut the per-performance rate set by the CARP for 

pureplay webeasters, which was based on the actual rate agreed to by R1AA and 

Yahoo!, by 50 percent 

The LOC' s decision also contained important language coneeming the 

distinction between the 801(b) and WBWS standards. The two standards. it 

concluded, "are not the same." Rather, the 80 I (b) standard is "policy-driven, 

whereas the standard tor setting rates tor nonsubsenption serviecs set forth in 

section 114(f)(2)(B) is strictly fair market value - willing buyer/willing sellcr. 

Thus, any argument that the two rates should be equal as a matter of law is 

without merit.,,64 

The LOC's ruling was upheld on appeal by the D.C. Circuit Court of 

Appeals."5 Howcvcr. cven beforc the appeal was decided, Congress - heeding 

complaints from small webeasters that the rates (even after being cut in half by 

the LOC) were too high, stepped in by passing the Small Webcasters Settlement 

Act of 2002 (SWSA),66 which "gave noncommercial and small commercial 

id. at 74-75 

id. at 77 

See Webcaster I. 

Id.. al45244-45. 

Dl Id .. at 45243 CAfter carefully considering the Panel's report and the record in this 

proceeding. the Regisler has coneluded thal the rales proposed by the Panel for Lise of lhe 

webeasting license do not reOed the rates that a willing buyer and \-villing seller would agree upon 

in the marketplace. Therefore. the Register has made a recommendation that the Librarian reject the 

proposed rates ($0.14 per performance for Internd-only transmissions and $0.07 per performance 

for radio retransmissions) for the section 114 license and substitute his own determination (0.07¢ 

per performance for both types of transmissions), based upon the Panel's analysis of the 

hypothetical marketplace. and its reliance upon contractual agreements negotiated in the 

marketplace."). 

" Id. 

til See Duval{ 2008 at 275-276 ("IIowever. the Librarian disagreed with CARP and found 

that there was no basis for ditrerentiating between royalty rates for Internet-only webcasters and 

webcasters who retransmitted radio broadcasts and that CARP's decision to distinguish between 

them was arbitrary."). 

64 See We;,caster Tat 45244 (emphasis added) 

os See Tleethm'encmn TIrv. Uhrariall ojrrmg .. 394 F.3d 939 CD.C. Cir. 2005) 

66 Public La,,"\' No. 107-321. See also Committee on the JUdiciary. The TVebcaster Settlement 

Act o{2009 (Report 111-139. June 8. 2009) at 2 

14 
100 

webcasters additional time to negotiate,,,67 and expressed to copyright mvners 

·"the strong encouragement of Congress to reach an accommodation with the 

small webcasters on an expedited basis."G8 Shortly thereafter, the small 

webcasters reached a compromise agreement with RIAA setting royalty rates that 

were capped as a percentage of small webcasters' revenues or expenses rather 

than calculated on a per-performance basis."9 

2. Wehcaster II 

The next statuto!)' license proceeding for webcaster royalty rates, covering 

the period 2006-2010, established rates through another fonnal rate proceeding, 

this one lasting more than two years, from February 2005 until May 2007/° this 

time under the purview of the Copyright Royalty Board (CRB), the successors to 

the CARP panel. 71 The Webcaster II, proceeding again involved direct and 

rebuttal testimony from dozens of expert witnesses, including formal hearings, 

hundreds of motions and pleadings, and over 13,000 pages oftranseripts n 

As in Webcasler I, the CRB evaluated several proposed benchmarks for 

royalty rates proposed by copyright ovmers and webcasters, again embracing an 

approach based on rates for comparable rights vvhieh had been negotiated freely 

in the marketplace. Specifically, the CRB embraced a model proposed by 

SoundExehange's economic expert, Dr. Michael Pelcovits. Tenned the 

"Interactive Web casting Market Benchmark,""' the model utilized the royalty 

rates negotiated individually between copyright owners and interactive music 

services (adjusted for differences in interactivity) as a basis for royalties for noninteractive services under compulsory licenses 74 Based largely on the interactive 

services benchmark, the CRB set per-perfonl1ance rates at 0.08¢ for 2006, rising 

gradually to 0.19¢ in 2010, as shovvn in Table 275 lllUS, under Wehcaster II, the 

statutory rate was scheduled to reach the 0.14¢ per perf0TI11anCe rate initially 

6i See Day 2UU9 at 1~~-1~9. 

68 Publi<: Law No. 107-321. Sedion 2(3) ("The representatives have arrived at an agreement 

that they can accept in the extraordinary and unique circumstances here pret)ented, specilically at) to 

lhe ,mall webeaslers. lheir belief in lheir inabilily lo pay the fees due pursuanllo the July 8 order, 

and as to the copyright owners or sound recordings and performers. the strong em:ouragement of 

Congress to n:ach an accommmJation with the small webcaslers on an expedited bat:iis."), 

69 See Librarian of Congre"" Notification "f' Agreement Under the Small Webcaster 

Settlement Act 0/2002, 67 fR 78510 (Dec. 24.2002). Rales were ,el al 10 pereenl of revenues up 

to $250,000. 12 percent of revenues above $250.000, or seven percent of expenses, \vhichever \vas 

greater. 

- 70 See, general~v. U"ehcaster 11. See also Library of Congress, Copyright Royalty Judges, 

Digital Perfonllance Right in Sound Recordings and Rphemeral Recordings, l\lolice Announcing 

Commencement a/Proceeding. 70 FR 7970 (Februaty 16. 2005) 

71 Tn the interim, Congress had passed the Copyright Royalty and Distribution Reform Act 

in 2004 which replaced the ad hoc CARP panels with a permanent Copyright Royalty Board. See 

Public Law 10R-419. 

72 See TFebcaster II at 24085 eln addition to the written direct statements and written 

rebuttal statements, the Copyright Royalty Judges heard 48 days of testimony, which filled 13,288 

pages oftIanscript and 192 exhibits were admitted. The docket contains 475 entries of pleadings, 

motions and orders.'") 

73 Id .. at 24092 

iLl See Duvall 2008 at 279. The eRE also concurred in the rVebcaster 1 determination that 

the preferred metric for calculating statutory royalties is a per-performance model. as opposed to 

royalties based on a percentage-of-revenue See rVebcaster II at 24089-90 

75 See Webcas{er II at 24096. 

15 
101 

J\:()ommcndcd hr !hi.' CA RP (10 WeIX;(lSirr n fo r 1998 10 20011 - i,e ., a dct:ldl.l 

i:llcnhall undc rthc origillal CARP report, 

TAOJ..H2, 

SU.'ftJTORY RoYAl TY RA fl!S FOR COMMER('lAl 

WmCASTI!RS UNDIiIi. W liUCASlEJI. n 

" nr Pcr-Pcrfonllante 

Ro ' 

''''' SO,OOO8 

201>7 SO,OO l1 

201»( Sl) OO I~ 

!OO') $0.0018 

201() SO.0019 

s.". ... , ' 12 FR ,'1~. 

The C RB"s dccision was appealed 10 Ihe D.C. Circuil COllrt of App.:ols. in 

111I,'n'j,/f"gulle Hroa,kasl System I', CvpyriShl I/(I)rlll), H()(lrtl, lf lh.: Court 

uphdd the CRn's d~t rrninati on of ro~ all y r,lIes for commercial wd)(:ast~rs., 

illcluding specifically its de.::isiol1 10 base royalties on the market-hased 

imcractivc services bo:nehmJrk,rr The Court also rejected \\'cbc:IstCI'$" assertions 

Ihal !lIe r.1tc s SCt by !lIe CRB wert: '·cmshing and disproportionale,"'''' and found 

in :111)' = that the WOWS standard docs not ft'q uiro to Ihe CRB 10 set r.1les th:lt 

allOll all rlnns III the market 10 cam (I pmfil: 

Finally, il was nOI error for the Judges In reject the s111all 

commercial webcJstel1l' pleas Ihat paying per pcrfomlancc 

would Il'rcck their inelTteicl11 bt1 5111CSS modds, The Judgcs madc 

d~ ar they could not uamnt~...., a profiublc business 10 every 

markel ~ntrant. " The Judges an: nol required 10 prcscrve Ihc 

business or e\1;I)' participanl in a market. TI1Cy art: n.:qulrcd to 

sc t ralCS alld ICnns lhat ·'most clearly n:prcsenl the r.1ICS and 

ICffilS thai would hal'c been negoliated in the mari<elplaec 

bctwC\!n " I\illi11g buy~r :lI1d a willing seller," 17 V,S.c. § 

114(1){1)(B), If small c01l1mercial l'tebcastcl'$ cannot pay !lIC 

sam e r.1te as other willing buycn- and $Iill cam " profit then the 

Judges are nol required to acc0111mod:lIe them,'" 

Thus. the coun nI!cd , whilc WCbei15tcrs arc guar.1ntecd access 10 sound 

recording pcrfonnauce rights nutle r a compuls()ry !ke nse. Congrt:ss dId nol 

e;.;tend 10 thenl a righl 10 pl:mell1al profilability 

, 

" &,~ 574 ~ jd 7~ ~ (D,C ei, 2j>OQ) 

Id ' 75~, 

... IJ,.' 71>11 n", Cn'~' di d, h,,,,,,,,,,. I .... le lhe> S.'i011 ,n;IU"'"'" r.., for tonll! ... ""n",o,.1 

.,., ,,,,,,·,,,,," ... ,,,,,,.1 ,,"Irc:'.IC"', "'""""'''8 ,",,_"" ",,11 '~" > "r ,ho CRU', ,,,lo ng r,,. """"",.d" .. ,,,," 'ti 01 7('~ 

.. I,t, nl 7(,1 , 

" 
102 

3. The Webcaster Settlement Act and the 2009 Compromise 

As with Webcaster 1, many webcasters reacted negatively to the Webeaster II 

dccision.'" Pandora and othcrs claimcd that thc CRB's royalty ratcs would push 

,Ycbcastcrs to thc ycrgc of collapsc,'! with Pandora asscrting that thc CRB ratcs 

would force it to pay almost 70 percent of its revenues in performance royalties 8c 

As in 2002, Congress reacted sympathetically to webcasters' complaints,83 

this time by passing the Webcaster Settlement Act of 2008 and later the 

Webeaster Settlement Act of 2009 (together, the "WSAs·'). Modeled on the 

Small Webeaster Settlement Act of 2002, the WSAs expressed to copyright 

owners "the strong encouragement of Congress to reach an accommodation with 

tile webeasters on an expedited basis,,,'4 and provided a window of time in which 

to do so." Not surprisingly, rights holdcrs cntered into negotiations with 

webcasters over lower rates. reaching eight separate agreements (containing a 

total of 12 royalty schedules) with different segments of the web casting market 

(e.g., non-commercial ,Yebeasters, non-commercial educational ,yebeasters, 

pureplay webcasters, etc.) in late 2008 and early 2009. The new rates, which 

were available to qualified webeasters on an opt-in basis, overrode the marketbased Webeaster II rates established bv the CRE for web casters that elected the 

altemate rates, and generally covered d;e 1 O-year period from 2006-2015.'6 Table 

3 shows the altcmate schedule of rates for Pureplay webcasters, which arc 

substantially lower than the rates determined by the CRE in Webcasler II. For 

example, the royalty rate per-perfomlanee lmder Webeaster II in 2010 would 

have been 0.19¢, while the WSA Pureplay rate is only 0.097c. And, the 0.014¢ 

originally scheduled under Webcaster I to take ctfect in 199X, and delayed under 

Webcasler II until 2008. was pushed back another seven years. until 2015. 

80 See c.g., Duvall 2008 at 283. 

~l See Day 2009 at 190-191 (""The readion to the elill rates \vas immediate and dramatic. 

Small and large webeasters alike predicted the C1Ul rates would result in the 'end of 1nlernel 

Radio,' For instance, Pandora Internet Radio CPamJora"), the largest and most sw.:ccssful online 

music Vvcbcastcr, maintained that it was "on the verge of collapse' as a result oflhc new rates."), 

R2 Td. 

83 See Elahe Izadi, "Pandora Growing Up \Vashington Sly!!:." National Journal (July 9, 

111 11) (available at http://intluencealley.nationaljournal.com/l012/117!pandora·aII·grown·up.php) 

84 See Small Webeasters Act of 211112 as modified by Webcaster Settlement Act of l1111R 

(available at http://\\'\:>..vy.copvright.gov/le£!i "lation/nll 07-321.pdD. 

85 See The Webcaster Settlement Act of 21J1J8. Pub. L. No. 1111·435, 122 Stat. 4974. The 

original deadline for negotiations, February 15, 211l19. was exiended through July 21109 by the 

vVebcaster Settlement Act of 2()09. See also statement of Senator Patrick Leahy, Congressional 

Record. (June 17, 2(09) at SG7411 (available at http://,,,,w.QPo.govifdsvs·pkulrREC-2111J9-1I(i. 

17ipdfiCREC-200'l-O('-1 7 ·pt 1· PgSG740·3.pdfiipa ae~ 1) 

86 See Library of Congress, ]\lofijicafion (?fAgreernents Under the TFebcaster Sefflernent Act 

c?f 2009,74 FR 34796 (July 17,20(19) (hereafter 2009 Webca8ler Sell/emen!) 

17 
103 

... t .... "- "--'-"" 

TAB!.r.3 : 

ROYA(;TY RA'IES Ftll< PURfJ'LA Y W EIlCASTIlRS 

UNDER TIlE 2009 WI'liCAsn:R SETTLEMENT AC1 COMI'I!OMlliF. 

~r Pe .... Pcrf"tmRnct' 

R"ya ' 

"'" $OJOOSO 

2007 $U./'ln08..\ 

2003 SO,I)QOM 

2()()t) $(l,OC m 

21110 W,11(lO\l7 

201 I S(U)Q @ 

20 11- $0,(1)1 In 

2013 ~O llQl!O 

2014 SiI 00130 

20 15 $O,UllI..\1l 

Imponantly, Congn:ss di recl~ Ihe LOC to make u c lear Ihat the Webeasl<:r 

ScnleolCot ACt ~tc.s "ere not to be lutcrpreted as "market b=d," To hlto,hl!&lJ1 

IDat t';)ct, Congress made d ellr in seclion 114(f)(5)(C) that lhe l1ew ~tcs we~ 10 

be ool1siden:d Ihe result of ''unique'' circumstances and, sIJCcifically, "ere- 1101 

precedcnt'31 "" Ih rcSPCCI 10 the WBWS Sl3l1dard: 

It IS thc Intent of Congress that any royalt), ~Ics, mtc structure, 

defmlltons, ICmlS, condlllOllS, or nOtice nod rccordke cping 

requiremcnts, included In such agreemcnts shall be considered as 

a comprunllSC motil'akd by the /tn/q/ti.' bllsin~s$, I:!t'Qlwmic anti 

poJi{/ml cin:lt11l.<ta/lCt'~ of wcbcastcrs_ copyright owners, and 

pcrfonncrs mther than as matters that would hal'''' bl:clI 

negotiated in the marketplace Ix.:twecn a willmg buyer and a 

lI'illings.::ll eL .. I' 

Thus. Ihe mlcs cLlm:mly Ix.:ing paid by "cbcastcl1I like Pruldora arc not "malket 

based," but ~th r thc result of a compromlsc which set rates Ix.:low those 

cSUlblished by the CRIl under Ihe WI3WS standard, and c.'{teudcd IDe teml or til!;' 

agrcemenl t1111)ugh 20 15, and required large pureplay "COCasICI1I to pay the 

grealerof 25 percent of re\'enues or the agrccd upon pcr play r.ltcs." 

While rules for 20 11 -201:' wcre established for most wcbeaslCrs by the 

varioLlS Wcbcaswr Scnlcmcnt Act compromises, tbe CRI1 was stil! obliged 10 

undcrt;Il:c ::I tlCW royalty mle pl1)CCi.-dillg to ~stabli h SUlfUtol)' r.ltes and tenns for 

the 21l 11-20 15 teml for \\cbc.aslers Ihal " cre 00 1 ;n Cl'lstcoCC :\l the I,U1C of the 

I' :;.,., lOOP H"'''''U>I~~.''''III"'''''1I "!~7%(~I"p~" .Jdc.i ~ • /d, • • l ).1711') 

" 
104 

Wcbcastcr ScnlCnlC1l1 ACI o r chose 001 \.() opt-in 10 0111." of lhe WSA rotc 

schedulcs,lI'l lkspilc Ihl.", fact thal moSt webeasters did nO! participate in the 

nx:;:~ g, the W,'IlC<I.ffer III rocc~ding im ol."OO extcosI" C dlll,X:I and n; pl ' 

tcstimoll), by numerous ~ports from all sidl:S. full bnc fi(1); duk' s. Jnd so 

forth. 

Applyi ng Ih~ WBWS struldard, the e RB once again (:IS in WebctI, /cr If) SCt 

niles by refcn;ncc to a benchmark Ixt!;IXI o n the nues nl."gotiated betwccn rights 

holders and llltcractivc dl ital SCT\-ICCS, "hieh an; not subject to the mpulso~ 

copyright and ihus lin; prim" fil(:if! market·b:lSi!d,'" The eRB relc;tSCd its rutc 

detelminations on March Q, 1011 , with rotes again established on a pcr~ 

pcrfonmlJ1cc basis, as shown in Table 4 . 

TAUL£ 4; 

Sl A l'UT0RY ROYALTY RA rES OR 

COMMt,RClA1 WE1JCASn;RS UNlJER IYIiJJCISt/:'H 11/ 

Year 

20 11 

2012 

201 3 

2014 

2015 

Per-Pcrfo rm:fIlCC 

Roynlty 

SO,OO l9 

$(1,002 1 

$(I,HOll 

$0,0023 

$(l,HUn 

!" glln: t below IlluSl r:I1CS the disparity bctwct'll thc roy:llty rates dctcmlined b~ 

the CARP and CRB under the WBWS SUlldard in the Well('(Jtl.', ,. Wrbctl$/er /I 

alld Webnwer Iff proceedings and the fOyalty r:lI~ S actually paid by pureplay 

I\'cbcaslcrs. The bluc linc in Figure I n::presents Ihc orig inal fo) nit> rates SCt b~ 

the CARP and tho CRR which appJit'tl the WBWS stllndard aft.er ex ll \'c 

p= dlllg! in which economic evidencc was uscd to ~s 11lat e a markc t-based 

mIl." . The 1\.'(\ line represents the final royalt} flIt.;:S actually cha rged to Wd JC:lS\CfS 

after their appeals to the Librnrian of COltgl'CSS (for W,'bc<l$I('r fl and 10 Congress 

(alkr WoJIlCM/..r 11),1 / 

II' Se~ JIt, .. ,,,II>'. L,t>rlrv or ClJlIf!"-s", c< pvlI~h' RO)'a!') Boord, /JIp '''/ 1)"';;-" "",,= Ri~'" '" Soo",J H .. ro.tii" K' mill Hp' ... , .... rul lI .. r rwil",gs, /'i,,,,1 II~/~ a/lll 0f'lk .. , 16 !oil lJ02~ 

("'b,d, lI. lUlt ) (he,an., 1I',/k>,,,,,,,, III) rill: W"/K>,,,,,", 11/ rrt>«.J'n~ b..1!"" "', Jl n..,,,, 9, 

:?tIU') . ,01 tI,,," 0''''''"1'1''''1 ",Ih ,lit: ""1101111)('''' II><" u •• lcr " .... ,," k~· Ihe Wcbc . ...... S..,k",,,,,, 

/1,1 "I"'R ,",~ .,. .. t,,,,,. ,,,,,,,II.,.! on .o1un,.ry "ll1"cno<ol, O"KIQH ,n"nv "r tlw "",I",. rbr "h"'h 

lC . """tJ 011>0",;", ,,",e """" J<l<f""Jl<,-d ~nd,~ If'~k<i.> ... ' 11/ '0 /J .. • t t 3()) , 

OJ c tha, t.'c, "<1IO!l¥lcJ ny .",.tt \\.t>o: •• I"I' ~ot tht liliUl tl \\'0""0.$'''' Scll ~ ... "'1 

1\(.1. "kl ~ .... ,., ~~' • share of" e''''''''''''' ,,"'oc, Ih." <'" ' I""·pcr/'on"on.o m,lt, . ," 1\111 

:<11.,,, .. , 

" 
105 

FIGURE I: 

COMI'IIRlSON 1)11 iNlTIAI. ANI) FINAl. WI10CASTER RuYM.TY RA rES. IW:i.20 IS 

SO.OO25 

SO.OO21 

SO.OO21 

$0.0019 

$0.0017 

$O.OOU 

SO.OOIJ 

$0.0011 

SO"'" 

StHlOO7 

A~ Figun: I shows, somc purcplny I\cbcast~1'S (including Pnmloraj hal'c secured 

per-performance royal~ mtcs well below the markel-based rates mandated ~ 

Congress under the DMCA. 

8. ::kcrmfl 80/{/J) (1m/ tlw 'N,/fI-Dil'mplw/I . SUllldnrd 

Unlike the WBWS standard. the 801(b) standard now being advocated by 

webc:tsters IS esplidtl~ nol" m:ltkcl-b=d - thar it. it IS nOI deSIg ned to replicate 

the rat~ s tl1m would be 3Chicved in a competitive market. R:uher. Ih" fonrth 

pillar of the 801(b) standard (Section 80 l(b)( I )10») reflects CongfCss' desm: that 

mtcs be sct so as to "minimize" any "disruptivc" impact on the p.mies; th~1 is. if 

market-basl:d r..ues an: de ~mll cd to be> disruptive for lie~ sces. Ihey must be 

lowcred. From a policy ~rspcctive, the "non-dlsruption" standard may result in 

10ddug in place inefficicnt o r obsolcte bu~;ncss models. or even cllcour::tging 

lIleffielcnt investmcms bv !inns which know that. undcr the 801(b) standard, 

!:lIes "ill be sct so as to pre,enr '"disrupuon" ro their bnsine ss modds For 

licensees aud rheir investol'S. s uch 1\ l'nraJ1r~ e is obviously quirc valu~blc, 

l bis subscetlon briefly reviews the applicalLon of rhe 80 I(b) srandard since 

liS adoplion in rhc 1976 Cop)ngJlI Act. focusing on proceedings im o l\'tn& 

royalt)' rates for SOARS 5C!YICCS. SDA RS J (completed in 2001>:) and SDARS 11. 

In SOAR:;' I, thc non..(!,smpt,on eritcrion pla~ed an important rol c, leading 

direell~' to rotes lower tll.1n would have been reached under the WBWS standJrd. 

And. IIhite the SDARS II proceeding is nor )'ct complere. rhe c.,..:pcrt economic 

testimony presented rhere dcmonstr.ues tlla\. :u ICa.'i1 in the eyes of copyrigJu 

20 
106 

users, the non-dismption criterion amounts to a guaranteed retUll1 on investment 

tor licensees, now and into the future. 

Before addressing the two SDARS proceedings, it is useful to briefly review 

three prior proceedings in which the 801(b) standard was applied. 

1. Early Interpretations of the 801(b) Standard 

Prior to the creation of the Copyright Royalty Board, the 801(b) standard was 

applied twice by the Copyright Royalty Tribunal (CRT) in 1981. and once by 

Copyright Arbitration Royalty Panel (CARP) in 199792 The two CRT 

proceedings involved the statutory licenses tor jukeboxes and for the mechanical 

license, i.e., the right to usc a musical composition when making a copy of a 

sound recording. As the CRB later noted, in the 1980 Jukebox License 

Proceeding,93 neither the CRT nor the D.C. Circuit (which reviewed the decision 

on appeal) dealt substantively with the l\OI (b) standard as such 9 ", The CRT's 

decision in the 1981 Mechanical License Proceeding, however, did address the 

standard, focusing on the statutory requirement that rates be "reasonable," and 

suggesting that the individual 801 (b) standards could be satisfied by rates lying 

,vithin a '"zone of reasonableness.""5 In its subsequent review, the D.C. Circuit 

agreed. 96 

In 1997, a CARP took up the issue of royalties for PSS under the recently 

passed Digital Perfonnance Right in Sounds Recordings Act. 97 When the 

CARP's decision came down heavily on the sided of the PSS, it was reviewed 

and revised by the Librarian of Congress, and rates ultimately were set at 6.5 

percent of revenues. However, neither the Librarian's decision nor the 

subsequent D.C. Court of Appeals decision (rejecting an appeal by the Recording 

Industry Association of America) dvveIt on the proper interpretation of section 

l\OI(b)98 

92 See, Reneran~\ General Accounting Office, Letter from Mark Goldstein to Senator Arlen 

Specter. GAO, 10, 828R (August 4, 20 I 0) (hereafter GAO 801 (b) Leller) 

93 46 FR 884 (January 5, 1981). 

Sl'1 See SDARS 1 at 4082 C\,Vhilc the Tribunal's decision was somc\vhat lengthy, its 

consideration and application of the standard and the Section 801(b)(l) factors was no!.... In 

reviewing the Tribunal's decision, the U.S. Court of Appeals for the Seventh Circuit gave no 

attention to the Section 801(b)(l) lac tors or the Tribunal's application ofthem, focusing instead on 

the appropriateness onhe Tribunal's choice of 'marketplace analogies. "') 

95 46 fR 10466 (february 3, 1981). 

90 See SDARS I at 4083. quoting Recording Industry "~lss 'no oIjmerica v. Copyright Ro..valty 

Tribunal, 662 f.2d 1 (D.C. Cir. 1981) ("To the extent that the statutory objectives detemline a 

range of reasonable royalty rates that would serve all these objectives adequalely bul to dilI<:ring 

degrees, the Trihunal is free to choose among those rates. und courts are without authority to set 

aside the particular rate chosen hy the Trihunal if;t lies within a '70ne ofreasonuhleness.-") 

9' See SDARS Tat 40R3 ("Unlike prior statutory licenses where the Congress llxed the initial 

rates within the statute. the rates for the new digital perf0n11UnCe right license were left to 

resolution hy a CARP. The Lihrarian convened a CARP in 1997 for PSS and SDARS. The SDARS 

settled with copyright owners and withdre\\l fro111 the proceed; ng, and the CARP rendered a 

determination only with respect to the PSS. The Lihrarian reviewed the CARP's determination and 

rejected it with respect to the rate as well as to certain terms, and the u.s. Court of Appeals for the 

District of Columbia Circuit revie\ved the Librarian's deci sian.") 

98 See RecordiflK Industry Ass 'n ,-?fAl'Ilerica, Inc v. Librarian ,-?fCOflRress, 17G F.3d 528. 

21 
107 

IEFFREY A 1',T~El\AC;H 

2. SDARS1 

In January 2006, the CRE initiated a rate proceeding to establish statuto!)' 

royaltics for PSS and SDARS for 2007/200R through 2012 99 Thc PSS scrviccs 

ncgotiatcd voluntary agrccmcnts, ,vhich wcrc ratiticd by thc CRB inlatc 2007,IOU 

but the SDARS services (at that time, Sirius and XM) did not, and the CRE 

issued statuto!)' rates for SDARS services in JaLlUaI)' 2008. TIle decision. kno\\ll 

as SDARS 1, left no doubt that the 80 I (b) standard, as interpreted by the CRE and 

rcviewed by the DC Circuit is likely to result in rates lower than the marketbased rates set under the WBWS standard. 

Like the Webcaster proceedings, SDARS 1 was a full-blown rate proceeding, 

featuring dozens of economic aLld indust!), experts, direct and rebuttal testimony 

and so on. lUI The CRE began its analysis by seeking to establish a benchmark 

based on vohmtarily negotiated rates for comparable ser>ices, and ultimately 

chose again - as in the Webcaster 11 atld Webcaster 111 proceedings - to rely on a 

model based on the market rates negotiated for interactive subscription 

services. ICC Based largely on an analysis by Dr. Janusz Ordover, the CRE 

determined that a royalty rate equal to 13 percent of subscriber revenue 

constituted a "reasonable estimate ofa marketplace derived benchmark.,,103 

TIle next step in the CRB's aLlalysis was to establish a '"zone of 

rcasonableness" within which the tinal rates - based on the ROI(b) criteria -

would have to lie. The Board determined that the 13 percent benchmark "'marks 

the upper bOlmdary of a zone of reasonableness for potential marketplace 

benchmarks," that a lower boundary was established by the 2.35 percent of 

rcvcnues paid by SDARS for musical works licenses, but that '"bascd strictly on 

marketplace evidence, a rate close to the upper boundary is more strongly 

supported than one e10se to the lower boundary .,,104 Hence, prior to explicit 

consideration of the four 80 I (b) criteria, the judges had in mind a rate closer to 

13 percent than to 2.35 percent. 

The next step in the Board's analysis was to determine "whether these policy 

objectives weigh in favor of divergence from the results indicated by the 

marketplace benclnnark evidence.""" Looking at the first two criteria, which 

rcquire, respectively, '"maximizing the availability of creative works to the 

public" and providing a "'fair return" to both copyright holders and users, the 

Board determined that no adjustments from market rates were necessary atld. 

99 See Library ofCongrcs5,A(ijuslmenl u/Rales and l'erms/ur PreexislingSubscripliun and 

Satellite Digital Audio Radio Services, 711'R 1455 (January 9. 2006); see also GAO 801 (h) letter al 

3-4. The PSS term slarled in 2008. while lhe SDARS term slarled in 2007. 

100 See Library of Congress, Copyright Royalty Board, Adjustment o/Rates and Terms jar 

Preexisting Subscription and Satellite Digital Audio Radio Ser1'ices, Final Rule. 72 l'R 71795 

(December 19.2007). 

101 See SDARS 1 al 4081 ("In addition 10 lhe wrillen direel slalements and wrillen rebullal 

statements, the Judges heard 26 days oftestimony, which tilled over 7.700 pages oftranscript. and 

over 230 exhibits were admitted. The docket contains over 400 pleadings. motions, and orders."). 

102 Id .. at 4093. 

101 Id .. aI4085-88. The CRD explained lhal. while il eonlinues to prefer a per-perfomlanee 

metric to one based on a percentage of revenues. several factors made it impractical to utili7e a perperformance metric in this case 

104 Td. at 4094 

105 Id. 

22 
108 

indeed, that the criteria do not as a general matter imply rates different from 

thosc set in the market1U6 

The Board reached a different conclusion. however, with respect to the latter 

two criteria, section 801(b)(1)(C) (which requires an assessment of the "relative 

roles" of the copyright owner and user with respect to creative contribution, 

technological contribution, capital invcstmcnt, cost, risk and contribution to the 

opeuing ofuew markets) and section 801(b)(l )(D), the non-disruption standard. 

With respect to the "relative roles" criteria. the CRE found that the need for 

SDARS to make "new expenditures related to their satellite teehnology ... might 

vveigh in favor of a discount from the market rate."I07 However, it detennined 

that this issue was "intimately intertwined" with the non-disruption standard, and 

decided to "treat the potential disruptive effect of postponing investment in new 

satellite technology" as part of its consideration of the non-disruption standard."" 

In applying the non-disruption standard, the Board concluded that a deviation 

from market rates was justified on two grounds - profitability and investment. 

First, it concluded, raising rates to the market-based level would "increase costs 

and raise the necessary critical mass of subscribers sufficient to generate 

rcvcnues that yield EBITDA profitability.,,11l9 llms: 

In order not to significantly delay the attainment and amounts of 

EBITDA profitability and positive free cash flow, some rate 

within thc zone of reasonableness that is less than 13% is 

warranted 1 10 

Second, with respect to investment, it decided that royalty rates should be set 

so as not to place "any undue constraint on the SDARS' ability to successfully 

uudertake satcllite investments plauned for the license period.',1l1 Based on these 

factors, the Board found it "appropriate to adopt a rate from the zone of 

reasonableness for potential marketplace benchmarks that is lower than the upper 

boundary most strongly indicated by marketplace data." Accordingly, it set an 

initial rate of six percent of revenues, rising to eight perceut over the six-year 

(2007-2012) tenn of the license - roughly 50 percent below the 13 percent 

benchmark it had initially concluded reflected a "reasonable estimate of a 

marketplace derived bencl~ark."l " 

3. SDARSII 

Perhaps the best way to understand tile impact of the 801 (b) non-disruption 

standard is to examine how it is invoked in an actual proceeding, such as the one 

the CRE is presently engaged in to determine rates for PSS and SDARS for the 

106 Td at 4094-4096 10' Td at 4097 108 Id. 100 Id. llO Id. 

111 SoundExchange appealed the eRE's ruling to the D.C Circuit Court of Appeals, arguing 

that the royalty rates set by the CRE were too low. The Court upheld the CRE's ruling. stating that 

the eRE did not act unreasonably in setting rates. The Court did not, however. make a 

determination on whether the rates themselves were too high or too lov",". See SoundExchan[.[e v 

Librarian cifCoflwess. 571 F.3d. 1220 (D.C. Cir. 2009) 112 Id 

23 
109 

IEFFREY A 1',T~El\AC;H 

five-year tenn beginning in January 2013.113 In that proceeding, experts for 

copyright users repeatedly invoke the 801(b) standard as the basis for claiming 

that rates should be set below marketplace levels in order to guarantee their 

clients a rate of return on both past and future investments, arguing that the 

standard not only penllits but could require the CRE to deviate from marketbased rates in order to advance ·'soeial values .. 114 such as "distributive justiee.,,115 

For example, one expert arguing on behalf of XM-Sirius asserts that the CRE 

is required to "ensure that all participants would still have voluntarily engaged in 

the market transactions needed to make satellite services available had they been 

aware of the rates when thev made the decisions to enter into those 

transactions,,,116 which is equiv;Uent to requiring that rates be set so as to 

guarantee investors profits on their initial investments, apparently in perpetuity. 

Another expert testified that section 80 I (b) requires rates low enough that 

copyright users arc able not only to ·'reeover the start-up costs of entering the 

industry,,117 but also to ensure that they can "recover the financial cost of capital 

for forward-looking investments," since rates that failed to give users incentives 

to r.:ontinue investing in their businesses would be "dismptive."'" 

To summarize, while it is theoretically possible for the 801 (b) standard to 

result in the same rates as under the WBWS standard,119 there is no question that 

the two standards are - as one supporter of the IRF A recently agreed - "starkly 

different.,,12o Nor is it surprising that, as one knowledgeable observer recently 

noted, ·'the change from the willing buyer/willing seller standard to the 801 (b) 

standard is widely anticipated to significantly lower the royalty rates that online 

radio services pay.,,121 As discussed further below. other elements of IRFA are 

also designed to ensure copyright users continue to pay below market rates in the 

fhture. 

113 See United States Copyright Royalty Board, Determination of Rates and Terms for 

Preexisting Subscription and Satellite Digital Audio Radio Services, (Docket No. 2011-1 eRE 

PSS!Satellite II). 

11el Vlritten Rebuttal Sirius-:x::M: Radio Inc 

50 

116 \Vrittell Rebuttal Testimony of Dr. Michael A Salinger on Behalf of Sirius-Xl\1 Radio 

Inc. (Docket No 2Ull-!) at 16 (available at httpi/www.loc.oov/erb/PfOccedillos'2lJll-

-"-W~~-""~"""'. m 81) 

of Roger Noll on Behalf of XM-Sirius 

ld.. at 

119 See e.g., GJO 801 (b) Letter at 5. 

1.20 ImJc:!:d, the desire to lower th!: "high royalty burdens" paid by wc:bcasters is th!: primary 

rationale offered by TRFA"s proponents for its enactment. See John Villasenor, ''Digital Broadcast 

Music Royalties: The Case for a Level Playing Field," Center for Technology Tnnovation at 

Brookings, 19 Tssues in Technology Tnnol'ation (August 2012) 1-28 at 9 (hereafter rrillasenor) 

l~l See Jodie Griffin. "The Internet Radio Fairness Act: Revamping the Online Radio 

Marketplace," Public Knowledge Policy Blog (Nov 2. 2(12) (available at: 

http://-·W\V\y.pl,blickmny]C'dge.orfT.'hlogim:ervie\v-internet-radio-faimcsc::-an) 

24 
110 

IV. BEYOND TIn: NON-DISRUPTION STANDARD: nn: PROPOSED INTERNJ:T 

RADIO FAIRNESS ACT AND THE MARKET FOR ONLINE MUSIC 

TIle Intemet Radio Faimess Act (H.R. 6480/S. 36(9)'22 would fundamentally 

alter both the standards and the process by which statutory royalties arc 

established for non-interactive webeasters like Pandora. As described in the first 

subsection below, the clear purpose, and the virtually certain effect, would be to 

tip the playing field against copyright owners in favor of the webcasters, 

resulting in lower royalty rates for covered webcasters - which of course is why 

the webcasters support it. 123 As explained below, there is no evidence that high 

royalty rates are stifling the growth of online music in general, or for that matter 

of Pandora in particular, or that such services would be rulable to pay market 

based rates in the future. 

Beyond simply lower rates, another argrunent made for IRF A is that it is 

necessary to create a level playing field - that is, to make webcasters like 

Pandora subject to the same standard that now applies to the three remaining PSS 

and SDARS services. The biggest problem with this argument is that noninteractive webcasters' biggest competitors arguably are not PSS or SDARS, but 

rather interactive services (like Spotify), which obtain sOlmd recording 

peliomlance rights without the henefit ora compulsory license of any sort. TIms, 

,yhat Pandora is seeking through IRFA is to increase the competitive advantage it 

already holds over interactive services by obtaining an even more attractive 

compulsory license. Meanwhile, IRFA would do nothing to address the other 

obvious imbalance in the sound recording perfol1nance right, which is the 

continuing exemption enjoyed by the over-the-air transmissions of terrestrial 

broadcasters. 

The first subsection below reviews IRF A" s main provisions and explains 

their likely effects on the rate setting process and its results. The second 

subsection shows why the rates currently being paid by webeasters arc not 

unreasonable, and why IRF A is not necessary to preser;e a vibrant and growing 

market for online music. The third subsection explains why the lmeeonomic 

rates IRF A would produce, along with the perverse incentives inherent in the 

non-disruption standard, would reduce incentives for content creation, slow 

innovation, and harm consumers. 

A. The IRFA Would Dramatically Tilt the Rate Setting Process in Favor of" 

Webcasters 

If one set out to write statutory language designed to favor webcasters over 

copyright owners in rate setting proceedings, the result would look a lot like the 

IRF A. While a complete exegesis is beyond the scope of this study, a partial 

listing of its more significant provisions provides a sense of the proposal's scope 

and ambition. Among other things, the IRF A would: (a) impose a heavilymodified version of the section 80 I (b) criteria for royalty rates, with the 

modifications further favoring webcasters; 124 (b) directly intervene in tlle rate 

setting process, by cxtcnding the vvebcaster-friendly Webcaster Settlement Act 

1~2 See II.R. 6480: Internet Radio fairness Act 01'2012. 

123 See e.g., Villasenor at 11 

124 See H.R. 6480: Internet Radio Fairness Act of2012. Section 3(a)(2)(bb)(JJ) and Section 

3(a)(2)(C)(i)(I) and (II) eIn establishing rates and terms under this paragraph, the Copyright 

Rovalty Judges shall apply the objectives set forth in section 801(b)(l)."). 

25 
111 

IEFFREY A 1',T~El\AC;H 

rates (for small pureplay webcasters) for an extra year;125 (c) shift the burden of 

proof to copyright holdcrs to show that proposed rates do not exceed an 

amorphous new standard;'2G (d) prohibit copyright royalty judges from 

considering certain types of evidence likely to favor copyright holders;'27 (e) 

reverse the CRE's (economically-grounded) decision to favor "per perfornlance" 

royalties over "percentage of revenuc" royalties;l2< (t) prohibit the CRB from 

relying on some (but not other) prior decisions as precedents; 129 (g) reverse the 

Webcaster Settlement Act's guarantee that rates negotiated under the Act would 

not have precedential value for rate setting purposes; 13" (h) create a special class 

of antitrust liability for joint activities by copyright OVv11ers, but not copyright 

users; 131 (i) inject politics into the process by requiring copyright judges to be 

confirmed by the Senate rather than appointed by the Librarian ofCongress;'32 (j) 

eliminate the requirement that at least one of the copyright judges be an expert in 

copyright, and one an expert in eeonomies;'33 and, (k) subject CRB rate decisions 

to de novo review, requiring the D.C. Circuit to essentially re-hear every rate 134 case. 

Among the many changes proposed by IRF A, the most profound include the 

provisions altering the substantive standards for rate setting, specifying what 

evidence the CRE can consider, and changing the mal(eup of the CRE itself 

First. in addition to replacing the WBWS standard with 801(b), IRFA adds 

four additional criteria which must be considered in setting rates: (1) the public's 

interest in both the creation of new sound recordings of musical works and in 

tostering online and other digital performances of sound reeordings;135 (2) the 

income necessary to provide a reasonable return on all relevant investments. 

including investments in prior periods for which retums have not been earned: 136 

(3) the valne of any promotional benefit or other non-monetary benefit conferred 

on the copyright owner by the performanee;137 and (4) the eontribntions made by 

125 Id., Section 3(a)(3)(E) CThe rates and terms of any settlements made pursuant to the 

amendments made by the Webcaster Settlement Act of 2009 (Public Law 111-36~ 123 Stat. 1')26) 

that were to expire before December 3L 2015, shall be extended through December 31, 2015. 

according to the rates and terms applicable to 2014.") 

120 Jd., Section 3(a)(2)(bb)(1l) ("In any proceeding under thi, ,ub,eetion, the burden of proof 

5ha11 bc on the copyright 0\\-11crs of sound recordings to establi5h that thc fces and terms that they 

seek satisfy the: requirements of this subsection. and do not exceed the fees to which most copyright 

owners and users would agree under competitive market circumstances."). 

127 ld.. Scction 3(a)(2)(C)(ii) (,,10 lhc cxlcnl the Copyrighl Royalty Judgcs considcr 

marketplace benchmarks lo be relevant. the Copyright Royally Judges shalllimillhose benchmarks 

to benchmarls rellecting the rates and tenns that have been agreed under competitive marh.et 

circumstances by most copyright users."). 

128 Id.. Section 3(a)(2)(D)(i) (lhe CRJs "shall nol dislavor percenlage of revenue-based 

fees."). 

1~9 rd.. Section 3(a)(2)(D)(v) (The CRJs "shall not take into account either the rates and 

terms provided in licenses for interactive services or the deten11inations rendered by the Copyright 

Royalty Judges prior to the enactment of the Internet Radio Fairness Act of 20 12 '-) 

130 Id.. Section 3(a)(3)(b) 111 Id., Section 5 13~ !d, Section 2(l)(A) 133 Jd. Section 2(2)(A) 13,1 ld.. Section 6(d). 135 Id.. Section 3(a)(2)(C)(i)(I). 136 Td Section 3(a)(2)(C)(i)(TJ) 137 !d, Section 3(a)(2)(D)(iii). 

26 
112 

the digital audio transmission service to the content and value of its 

programming. m Each of these criteria is favorable to webcasters, none more so 

than the requirement that the rates be set so as to ensure copyright users earn 

profits on past investments. 

Further, IRF A shifts the burden of proof in rate setting proceedings to 

copyright owners, who would be required to establish that the fees in any 

statutory license do not exceed those to which '"most copyright owners and users 

would agree to under competitive market conditions," defined as conditions in 

which none of the participants have market power. IN As a practical matter, it is 

likely that the only agreements that \yould meet this standard would be ones 

negotiated by the smallest independent record labels - i.e., the ones willing to 

accept the lowest royalty rates. 

Second, in applying the new criteria, IRF A directs the CRE to ignore some 

eyidenee, but demands that other evidence be considered. Judges arc prohibited 

from taking into account the rates and terms in licenses for interactive services 

(which have provided the benchmark for the market-based rates in Webc.:aster II 

and Webc.:aster III) or in the CRE's previous detenllinations, but penllitted to 

consider the rates set by the Copyright Royalty Tribunal in the early 19XOs and 

the CARP/LOC 1998 Webcaster I decision140 In the meantime, rates negotiated 

under the \Vebcaster Settlement Act are, contraf\ to the Webcaster Settlement 

Act itself, now accorded precedential value 141 in short, evidence favorable to 

\yebcasters is required to be admitted, while evidence favorable to copyright 

owners is a priori inadmissible. 

Third. IRF A would change the mal(eup of the CRE itself, Judges would no 

longer be appointed by the Librarian of Congress, but instead by the President 

with the advice and consent of the Senate - thus ensuring that the filling of every 

vacancy becomes a vchicle for a political contest between thc interested parties. 

Of equal concern is that the qualifications of the judges themselves would be 

changed, removing the current requirement that one of the three judges have a 

significant knowledge of economics and another have significant knowledge of 

copyright law. In the future, judges would be required simply to have ten years 

of experience in arbitration or litigation - that is, to be process experts rather than 

substantive ones. 142 

At the end of the day, there is no question that, as Villasenor puts it, the 

'"obvious consequence" of imposing the 801(b) standard '"would be lower rates 

for webcasters.,,143 As discussed below, however, forcing copyright owners to 

effectively subsidize webcasters through artificially low royalties is neither 

neccssary to promotc the growth of onlinc music nor desirable from the 

perspective of innovation or consumer welfare. 

B. The IRFA is Not Necessary to Ensure a Vibrant Market/or Online Music 

TIle market for online music is intensely vibrant and growing rapidly. Tens 

of thousands of new listeners are signing up to services like Pandora and SpotifY 

138 Id, Section 3(a)(2)(D)(iv) 

139 id. Section 3(a)(l)(B) 

).10 Id.. Seelion 6(a)(2). Section 3(a)(2)(lJ)(v). 

141 Id.. Seelion 3(a)(3)(b). 

142 rd., Section 2 

143 See Villasenor at 13 

27 
113 

e, e~' week. and existing h5lcl\crs are using the services more and nlOfC. intensely 

every year Online ;ukertising revenues arc growing 30 percent per year'''''. ne .... 

finns are entering the market at a rapId p<lc<,:. and existing finns are garnering 

billion dollllr man-c.t I"aluations. As ViHaSl'nor puts it. '"The future of music 

dlstributJOn is clearl y digital ,·''') 

Agalnstthis rcality, lRFA proponcnts argue thm \\'cheasters need the helm,-

market r~lCs alld guamHl~'Cd prolil.'l tile Icgi l~tion Ilouid provide In ord~r to 

··sro" and evoll'e:"" MOI\:OI'Cr. they argue. the cumnl sySll'm. is broken 

because tJlIl ··oncrous"· WOWS standard can result in 1\'ebcast~T'S p~ring a higher 

pcrctmagc of tJI~ir revcnues in royalties thall othn OmIS. illcluding 11\ particular 

Sirius_XM.ll7 NeitJler argument withstands even cursory scrutiny. 

first, the current copyright regiml' is m~nifestly nOI prel'cnting the onlinc 

music industl1' from "growing and cl'oll'ing·' at a rapid pace . Online r.ldio is a 

two-sided market. inl'O],'In,g both listeners (I, ho. depending on the business 

mudel, may al>o be subscnbcrs) ;lIld adl"crtisl'l"S. Both sides of the market arc 

groll'mg ~plosi"tl) . 

For example, FigulC 2 below shows the proportion of AmerierulS \\ ho have 

liStencd 10 online r.idio in the past 30 days frQm 2002 through 2012. Growth 

throughout Ihe period has oc.:n rapid bill has ~ceckral~d i\1 n;~nt ~cars. \\ltJl 

listenership nsing by ncarly 50 perccnt ill just the last Iwo ~'e3 . 

,,,. 

''''' 

,.; 

FtOlJfUl. 2' 

PERCroN1' OF AMI,klC"'NS WI to HAVE LtSTENIm ro 

ONI.INE RAo to IN THE LAST MONTI I 

21% 

21% 

~-t(21% 

"'" '50' 21 ~ 

" .. 

"" 

200l 2003 2004 2005 2006 2007 2008 2009 2010 1011 2012 

.""'"w; Ed;",,,, R.,..".",II . ~ h,linlle fli. 1 2!1l2, Na"~"'I'O! DIgital Pl" f",.",. 2()12." 

l"'ne" .. "on l:ompllll,on •• ' S. 

II< s.,~ FiJl ,,'~ -II>.'1"" . 

m .W 111/'<f<!IIQr'1 t7. 

I"" .ve E~"1 rd mod,. "Con8r~ .. Should 1';Iy; I~ lnfOfll<1 J, o I-l1ImClt< 1\"1:' n".lfil/ ·, 

(;0<Ii/f<'!" HI"I! ({kl<lba" 2S. ;>jJl2) ta,-.. I"ol e 01 hIl ·I h.hIIL""",,I'bI"' ~on~JrIO ... 

bl"W"'""""I"!lVf.l6.19 15-.0"" 8N".,"""l d·~.nI"ITI" ·IlI JI ,,"fB 'rrlt .II-""1 ~ 

II· .~. Jillll."''''' 01 t7 

" 
114 

As th~ figure shows. Edisol] Rcsearch/Arbitron I\'pol1S that:m ~stimalcd 10) 

million AmcneallS. or 3\1 percell! orthe entire U.S. pop-Illation aged 12 and older, 

no\\ lun.:: in 10 somc form of online radiO each month .II Similarly, the amount of 

time Ih;u listellers spend cngagcd Iluh onh n~ radiO has ;tIso increased 

dr.unatic3Jiy. As shown ,n figun: ) , In 20 12, listellers ri:ported SjlCnd ing an 

avel<lgc of 9 hours and 46 min lites per wcck listening to nlin~ rndio. up from 6 

hours and 13 minutes in 200~ (an incrcas.: ofol'er 57 pcrcclll).'''' 

10 

, 

• ! 

• 

7 

6.13 

, 

, I 

2Oll1l 

FlO!lRIi 3: 

A Vl;RAGr: W El,Kt,Y otTlI.~ SPh"NT 

LISTENING ro ONL.INE RAuto 

8m 

"" 2010 2011 

9.<16 

lOl:! 

Sc;..rr:c' Edi""" Rc;arth. '-n.. Info",,,, 1';.11111::- N.~'B"ona /Jig".1 PllIlr""""Z\JI:'..," 

",,,,,,"'111',,,,, C"'nl'"ni",~ 0" . 

Not llrpri smgl~_ the rapid growth In listenership is leading [0 equa ll ' rapid 

growth in ool'crtislIIg revcnues. Overall. onlin,' advertising is Ihtl f.'liiICsl 

growing category of advertising worldWide. growing at 7.2 percent o\'er Ihe 

past year.

' SoI As shown in Figure <I below, online lUdio advertising is growing 

even f.utcr: Acconhng to SNL Kagan. oulin!) radiO ;ld\'ertising f(:l'cnucs ",II 

3pproach S4{)(l millioll in 20 12. and an: projectcd to grow at a compound 3l111ual 

raleix't"ccn 12 and 14 perccnt ovcr the nc:«:t decade. 

I. .'in- l'.Ji~m Ik.e"rch. "'TI .. tn~"il~ Dr~1 :!Oil' Nhil!"II"g 1.);8/101 11. ,f<)no. :ro11 .~ 

)'rcs.:-nlQli"', Ctlll1"',llo". "Il). '.. '" l .. . ",-", N,d""'l, 1J', ... 1oI1r."./, 1:~1) 12 ) (.""""iIl8 "'., 00]" .. nd" ~nl""l! ,,'IO, Iii;, r""I"'" 

grt''''"@ <. "SQ<' ~f "d""'1!<ing 'n ,"'" fin<! holf ur 2012. ur 7.2 p<Jt"'1 '~'"'I"'od '" Ih., '.lime 

ret,,1d in :!Ill I) 

29 
115 

FloUlif. 4: 

PUREI'LA Y INTERNET M USIC AND RAl)IO AI) REVliNUE 

PROJI:CTlONS, 20 11-202 J S MIL 

5L200 51, 100 

'990 $ 1.000 .900 

$800 S690 

$790 SSIO 

.... S600 5nO 

$390 S420 

" 00 

ru~ $200 

SO '- ~ 

-t'" -" , ~" ~ .... ). ~\'l 'j,~ .... b ~" ~ .... "" ...,~\o. ~...,<:l -1'" 

, " 

, , , , " .W-If< SNI. KIS'" 1011 1""lud .. "" 110 mob,,,.d '0 "" .... t,,,,, I,,,,,,,,,, M""~8t>J R. lQ 

I'u,oplo}. (; t , A,·ouR.d,,,. AOI. Kad;", (loom Rod, ... loast,f,n. 1."," .l65. MOO.I'irndurrr. 

SI""."" S,;,d"". ·r"''''lhlc.fm. Y.h""IM""' •. ,I<'.) 

Tbc rapid growth of dw industry has tr..msl:ut:d inlo fi n3ltc;31 success for 

cxisting (,mIS and lhe ent~' of ncw on~~ , Pandor ... , which is by its Oll'n arcount 

the kad~r;lI ;ntcruct radio in th t United Stales," wilh a dominam 1I1lrkcI share 

of69 percell!' has ocen the biggeSl ocllciicial}'.' " As shOlI"n in FigureS belo\\_ 

Palldor.t"s Ulinual lislclier hoUf~ hal'e mon: lh3ll quadrupkd In the lasll\\'o yClIrs. 

from 1.11 billion 10 ILl billion. Revcnues ovcr Ihc same period halc groml cl cn 

fasTcr. from $55.2 I11ill;01l in 20 10 10$240.0 'llilliotl ill 20 12."1 

1'1 s....l'."d"'. M •• l,a, 1"",. 2012 Fon" WK "' ~::! (" I""dur." lile t.:.d<t '" ;"'ot",,, ",di" ,n 

,he 11,,,,ed S .. "" , Ot1l:fI~S ' """",~.h'l<d c~l"'nclItt for <:a<h "f(IU, Ii .. """", We ba,e piOf«Cf«l . 

n,,,, r .. ,n ur ... d'l> _ .. '" 11101 u". ''''''''". q,,,ht,,."' "r ,n",,,, '" in",all) ~,...."ic " 011"" •• nd """, 

.. lop" pl.vli ... i" ",.1-""", blIoed "" ,r.: ""';,,d, .. ) roedt."ck "r each li.re,,,,, h' Jar" •• ", ~!t ::!, ,,,. 

hood ""., 12S milliull ,cg,lt",,<"d _". which "e del,,,,, . , I ..... ,mol nu,""", "r ., .... "'1»1. thai h,",. 

t. .. , .. n ~ontcJ fo, 0,11 """ji:<: II p.",<l<i end. on.! "" ~Jdc.t '''~) ,,,,.,, r<gi. 'c" .. <l USQ' c''''Y , • ."..-"od 'In 

, ,·cNlge. h ,,. tho liseal )'Clt, Cf>JcJ J&nUll'>" 31. 10 12. we "",1.",,"'<.1 M.2 ~ilion 1ro.I" .. of,."Jio ,Id "' Of' 

Ja", .. ry .11 . 2(112. II. bad.l7 milli on ":1". usm;. M<:<>n\"'i l() a Ja,,,....y 2012 ,epOr' b;, TnlOn. "'c 

.,. """ "r,1>c 1<Ip W 'nlrnK.-' radiO .taT'''''' 100 ... ~,, ; in Ir.: Uni k,d S'.I"" anJ II. haw """e 

llun a 69". $har< of "".rr"" ,aJ,o. S,,,,,,, ". low,.,hcd ~ P",d"ro """"" ,n :lI1Il~. "Uf 1"'1<",,,,,,, l1li,'. ,,«o,.d ", .• , 204 "'lti,," """0''''., 

,<: fd. .,~O 
116 

F)GUlIE 5: 

PANOORA ANNUAL LlSTF.NEK HOURS BllJJONS. 2010-2012 

10 

8.2 

, 

2 

o 

Much of the rnpld gro\\'tll IMI has occurred ill the past few YC:lrs i~ assoemt .. -d 

,,'th the rapid adoption of smart phones and the 3ccompanymg mcn;<lSC In 

mobile consumption of digit!ll media. For example. :IS shown in Figure (, below. 

Pandor.! II:ports that as of 20 12, 1lc.1rly two llm ds of a ll listening hOllrs an: 

accollnted for by mobile deviccs. Notably, SNL Kagan n:ports thai III 2011, 

Pandom W$ the fifth !:Irgcsl U 5 mobile ad nc!\\or\( by revenue, ranking behind 

onl)" Googk, Apple. F3CChook and Twiner. and I'as growiug at 476 percent 

annually, jar faslcT Ih;UI auy ofrhe olher (01) l5 f,mls.l' l 

,.., s,... SNL Kogan. lIoN!.. Au ~, .. ""b by H.,·~,,~ , U",,,I/ !i~",'. (20111 (sll!xcllr""" 

"''IU'''''') 

31 
117 

FlOLlllf. 6; 

PEI<('IlNTAGBOf TOTAL PANDORA LlSTI1NINO 

HOlJRS ACCOllNlU)!-OR 11'1 MOOIl,f. 

'''' 

As a result Ofil! mpid }!!"Owth. and of market expcct~ti s thm it would continue 

to prospe r in Ihe fUIII N, Pandora u~ccss full y '\ICI11 public" in lU ll. ga rnering 

la'Se pa~ offs (or ils arl~ 'Mcslors.

I

'" nle finn nO\I' Ir.ldes on the Ncw York 

SlOck Exchangc under the symbol -'P: ' As fmid-No~ mber 20 11, Pandom II-as 

valued ~I S 1.3 billion.'" 

P;mdo r.i" s de fcnders ;,uguc. hOllcwr, th;!! the eornp:my has no\ ~ct ;schiel'cd 

profilabilil) _ and Ihal '·c;o.:ln:me ly high royalty burdens" ' :Irc 10 blame. ,,·ith 

contcnt costs accounting for 60 pe rel'nl or morc of rel-cnucs.

I

'" The· situation 

\l ould be even \lorsc. lh~y \lam. ,f P:mdom and Ihe Other wCbcaslers c urrentl) 

col'crud by the Wcbcnstcr Sctt1clnCI1l A~t ngre~ lll were foreed 10 pay ~ 

(highcr) ratcs dctennined by the e RIl 111 Webca,I'ler 11l.'J· 

There re scve ral problems \\'l1h Ih~sc arguments. FIrst. the fuct thaI Pandom 

has nOI yet achiel cd profitabil ity is hardly 3 surprise. Olher successful onlinc 

finn s, 111e1uding Faccbook, GoogJc, VOIlagc and many olhers, havc laken y C:lJ'S 10 

aehiel'e IImlil bili -; S(lmc hal'l: yel to do so. There is n good reason for tllIS; 

l'l!c nwt markets arc char.u:tcn lcd b)' network effects, omann)g that linus 

compele (ill II'h~t is sometimes rcfcm:d 10 as ;) " land grab slrategy" ) 10 achieve 

crili cal sc:Jlc Whil c il is thus typical for linns like Pando r.l 10 irll'est in c ustome r 

nequisillo n for an I11I!Ia! pt:riod before Ix:coming pmlilablc, m then:. is no 

IH Fot """nI~le , ,n (lit r"" II 'tI<Inths "r ~1l12, I",ldn", ""lbu,ld.r rim WC"I:f~r." ""Id 

vJUIIJU , h."" "r '''nil"", 't""~ v .. IUOI:d a( ovo< S9.~ mi!II"" S~~ 

hIlP:' ""''' """k~t\\ I<,k "o", 'nn"lll'..-'''''''k.p " .. ,d.I1' rrd 78..'l..I91'.1f! , 

'" ''''~ Y~hoo)l ri ... r~. ,'" s.. ... l'il/" ..... ,.,..., II 

'" Iii 

I'll $u, E!",,.,,,,I(,', Jo/f",y II. Il"htr •. ll.",d .. ~go., Flfo<" It! 1lir,J,·r.<Io,.,,J,,t::' h~ht .• """. 

(MIT Pte ... :WO.\) St,· ", ... , ''0"11<,,. M,'\\i., 1",,- r""" Sol (Fol,,,",,,,' 11 . 20(1) 01 II f'Si,,,-'C mil 
118 

economic Of public policy r:uionalc for forcing tbeir supplie rs to subsidize such 

Slr.Jtegies. 

&.-eond. Ilhilc PandorJ'S cont(,:nt acquISItIon costs havc indeed groll'l! 

r.lpldly, Ibey h3W nOI g ro\\n as r:lpidl) its revenues o r. fo r Ih31 m3l1cf, as lIS 

o, c rhe3d As shown in Figure 7 beJow, P3ndorn'5 content acquIsition costs Im\'e 

grown b~> 35 I percenl over the past 11\'0 ~ars. w~\'c , ils fCW l1l1CS h3\ ~ 

inc rc.l.SCd ~n fast~r. by I1carly .tOO pe rcenl, wh ile its adm.nlstr.ll jve nnd 

rh ':Id cspenscs h3\C grown cvcn [:lSlcr. bl 457 pertent ove r the past tWO 

)'cars. 

F'lGl1Rr. 7: 

PI!RCl!NrAG£ GROWTH IN j'J\NOOIU> COS'(SAND RBVENUES. 2010·20 12 

"'"' ~O% 

-

""" -

'''''' '00" 

~()I)& 

I""" 

"'" "" 

Developm "'""'" ml 

4S7% 

Genmlll.Do 

Adminisu11fve 

·nnrd. I,hile Pando r.! makes much of the fact Ihal L'Ontcnl acquisition accounts 

lo r a ]al'];':: proportion of its rcVCI)UCS, I"" in ]bct its conlcnt costs as a proportion o f 

revenucs arc eompilmblc 10 olher, similar finn s, For exampk, wbile NelfliS' 

olTers video r..Ilher th31l audio, and its rCI'cnucs come morc from subsc riptions 

Ihan from :Jd" crtising. Its basic busm<,ss model - lf~rin £ on.cJemand audiovideo oontent ovcr the Inlernet whi!c minimi7JIlg its own illfmstructure costs - is 

~e )' smlllar to Pandom-s, 

As shown 111 Figure Ii beiOII, the proponio n of rel'CllliCS !Iccounted for ~ 

000\('111 COS IS for Nelm,'( and Pnlldor:l h:lI'c OC'CII ncar! ' idelltical 01 cr Ilw I!lst 

thfC."t: years (2009· 20 11) for which daL'I is avai!3blc from both limls: indeed. for 

1""" "";,,0 , 1\ 2QCXi. \\c ho,'o: "ICUO,-d ., n,r"""'l ,,"I <>p<:rol' ''1! I..,...,., nd u." fo.,t" bo, 31.11110. ~ 

llIl\l . 01 ... .., IIf)1~t '"J del;.,1 of S8l.9 "" ll;on. II cy d~nlCni of mj" "fin",,!!., 10 t" '~ Sn>i ~I ) 

II", ....... the "",,,her nf ;'t~' !Oni . ,>.lli.Ie",,, 00...,. 10 ;JIII, .. .., nu, m"t '1 1"',,"ro lKtn.. ",. 

I'" Set. •. 1. !',,!<lu .... MoJo . I"" .. 2UI2 I"~rn ItlK 111 

J3 
119 

':<lCh of lh ~ lasl IWO yc:.rs. N~t f1 is h:u paid a ;g ~r proportion ofiLS reve llues fo r 

oonlCIlI acqUlsi LJ on than has Pandora. ,'''' 

'''" 

FlGUR),:)!: 

CONTENT COSTS AS A PERCENTAGEOIi EVI::r-::Ur~<; 

PANDORA VS ~"1l' l.IX 2009.20 11 '6' 

'''I 

2010 20 11 

It is noteworthy thaI. likc SOmC of Pandora's competitors in thc :a udiO market, 

Nctllix docs not benefit from :I compulso ry license, but Instead re lics on 

negoti g contr.lcts with content (m ~rs 011 a vohlnt:l · basis. And while the 

firm has had somc stumbles r the past yC3t, its m~lit l capitali7.a!ion In late 

2() 12 ~"tood al ol'cr $4.4 billioll. As of No\'cmber 20 12. the linn was fig hting o lT 

a takeol'er bid by ~cstor Carl leahn, Ilho believes it is undervalued. 

nol\l ithSt:lnding the fact thal it pa)'S ove r 50 pe rcent ofilS ICICIlU CS for cont~nt ('::l. 

FOUM . and finall y. Pandora's claims of impending doom with respect to 

conlent COSIS arc bdi~d by the f:ac\ that OIher fimls an: rapidly entering the 

market to eom]'ICle I"ith IL As il reportS I n itS most recent 10·K. ·,he :ludio 

cllIertammCll1 marketplace cootmllcs to rJpidly UI"olvc. providi ng o ur listenCIl! 

hI" M",~ b\""dl} , ,t "<Qmnl<l"rloo:c fQf diStt.' 'n~ .. " di:;tributor. or all " nl":' 10 1"') 60 

p''''''',,1 '" """" IIf lhe" ,~, ~""", ( ... """",n!, SC'C". I! .. $10" " """Ill""', " rl>< N"" 1k0000nu". "I' 

d", M .. ,o t..JuOlry," 1101''''11 .~/ut'" (Ot!Obcr 25, WI LJ (8,'o,laI)l0 . , 

IdIP ' .... "" I"IIUS'IM" ,010 0)11'1" GMl'I'e:Ib:l\,£o:plWOlNh·<'f·'b!;·mtl!lt-in,jt,,!t\· ""'Ill tI?S'l 

1"1 Notn: I-'3nd"", "'I"Ott<'\:ot\l"'ll .... Q'''''',.,,'' """'" ,n U. """".1 III-" fil,,,l" A<:Ct>tJ",g '" 

1' .. 0<1",.', 21112 W.K, ''Conic", ~"'l u"tI"''' ""rcn= pn'''''p:llh' "",,, .. >I or 'n:-oI~, .. I",d r ... 

01""""08 ,", .. ,e !It <>I1le, , .. ""c,,( 11> our liAAI.' .... , 1(0)'01",." •• '" ""k,,I. ,ed "''''!! "''l!<>'''lcil '"'''' 

do ll'umcnlod II! maSlc, ,,,,,.Iw .g .... ..,,,,, ... l> and . ," h •• cd ,"' Omll P<"""''''Sc '" fO'cO ..... ,JJ 1,,,, .... , 

""1o~ • ." ,-;... l'andon< Mcdi~. In(; .. r.",m I(l.K (Jon, 31 , ~(}l2 ) 01 4(" N~Ul, s '"11,,,1> """"lor 

""booc"plioo ~ ""'R ,n ,Is "~'IIIIJ I()'K 111;'18> A<,"(},dlni Iii II", ~Q!OJ"O'\)".1O[2 Hi.K. ·i.'CIS' (of 

tuh<ic"pfi"" 'e,""""" <0!"1lI~ "r ox""n ... ",holed I" In. "'Q" .. ul<)11 . ,Id li""",IoI! ()f cOI,lonl, •• 

woll os .onlon! dohon' C<><IIi, ." -"<I. Ncln,~ I .. " I'l>f1n I(\·K ("ob, H), 2(}12) II 28, 

I~ s.,., (if,"!! 1lt"''''St" "!cohn SLIms Neln" ' I\!",ur, I~II ,''' TIM II'nll SIT.." J_",,/ 

[Non"n"', 5. 2(12) ("".il.blc ., 

hill' .. ",jj"" ''~J <om 'l!,tide<Sn Of~H4240smO~J:lM68' 57~ 00bI\22(,(U~ 122,b'ml). 
120 

with a growing number of altematives and new media platfonns.,,163 Among its 

compctitors: Last. fin , iheartradio, Slacker Personal Radio, Rhapsody and 

Amazon. Recent entrants including RDIO, "a rival streaming service created by 

the founders of Skype,,,IG4 and Spotify, which has four million subscribers 

worldwide paying $10 per month for the right to access music online l65 and was 

rccently valucd at $3 billion l66 As oflate 2012, reports indicatcd that Apple was 

also preparing to enter the market for online radio l61 

The flood of new participants in the online music business is important for 

two reasons. First, these finns (and their investors) obviously do not share 

Pandora's gloomy forecasts regarding their ability to eam a fair retum on 

investment. Second, and at least equally important, many of these finns -

including, for example, Spotify - are not eligible for the compulsory license at 

all, and thus have no choice but to negotiate copyright agreements in the 

marketplace. According to reports, Apple may choose to enter the online radio 

market through negotiated contracts, eschewiug the compulsory license 

altogether. 168 

The fact that other flmls see opportunities to profit in the online music 

marketplace suggests to some that Pandora needs to take a closer look at its 

business model. As noted above, online music is a two-sided market, with some 

(and sometimes more or even all) of the revenues coming from advertisers. Yet. 

if a fiml (like Pandora) is engaged in a land grab strategy designed to maximize 

its market share in the short run in order to capture economics of scale, too much 

advertising risks driving consumers to competitors. A number of analysts have 

noted that Pandora has failed to fully monetize its large and growing audience. 

As one well-respectedjoumalist put it: 

Throughout the music industry there is a wide belief that 

Pandora could solve its financial problems - the company, which 

went public a year ago, has never tumed an al1l1Ual profit - by 

simply selling more ads. 1w 

163 See Pandora Media Inc .. 2012 Form IO-K at 7 

164 See Andy Fixmer and Adam Sntariano, "Apple's Online Radio Service to Challenge 

Pandora 1Il 20 ]3," 2012) at: 

See Peter Kafka, "Where Did Spotify's Billion Dollars Go? Ask Ndflix," All 1 /zings 

(No\' II, 2Ul2) (available at: http://allthingsd.eoIllJ2Ul2111 Jiwhcre-did-spotifvs-billion-dollarsgo-ask -nctflixi). 

- 166 See E\'elyn M. Rush and kssica E. Lessin. "Spotifv Seeks $3 l3illion Valuation." 1he 

Wall Street Journal (No\Cmber 9. 2012) (available al 

hllp:! (professional. wsj .eom!articlciSB I 00014241278873248941 045781 09482459713880.hlm1). 

167 See Fixner and Satariano 2012. 

168 See Pixner and Satariano 2012. 

160 See Ren Sisario, "Proposed Rill Could Change Royalty Rates for Internet Radio:' The 

New York Times (September 23, 2012) (available at 

httr://\''\\-'\v.nytjme').com/2012/()9/24Ibu'''ine'''~:medin:proD,....,sed-hill-couJd-('hnnQe-wva1ty-rilte3-t~....,rimernet-mclio.htm!). See also Richard Greenfield, "Congress Should be \-Vorking to Raise Royalty 

Rates on Pandora, Not Lower Them," ETIG Research (September 24, 2012) (available at 

http://"w~\.v.btigresearch.com/2012/09/24/congress-should-be-working-to-raise-royalty-rntes-onpandorn-not-Iower-thellli) C[T]he reason why companies such as Pandora pay such high royalty 

rates as a percentage of revenues is because they severely limit audio advertising to protect the user 

experience and keep people on the platform. If Pandora ran several minutes of audio ads per hour 

(the Vtifty terrestrial radio does) vs. just a few 15 sec. 5potS. the % of revenues paid out as royalties 

35 
121 

IEFFREY A 1',T~El\AC;H 

To summarize, Pandora's argument that royalties need to be reduced in order 

to preserve a healthy market for online music is simply not consistent with the 

facts. The market is vibrant and growing, and expected to continue to grow and 

evolve in the future. Pandora has been a major beneficiary of that grmvth, and 

while - likc any tinn - it would prcfcr to pay less for inputs into its production 

process, there is no public policy basis for forcing content creators to subsidize it 

or other webcasters by setting royalties at below-market rates. 

C. The IRFA Would Exacerbate Market Distortions, Reduce Incentives to 

Create Content, Slow Innovation, and Harm Consumers 

The IRFA is advanced by its proponents on grounds that it would create a 

level playing field for users of sound recording rights, increase revenues to artists 

and rccord labcls, and cvcn promotc innovation. Each of thcsc claims is 

incorrect. In fact, on each count, the opposite is true. 

First. while it is accurate that the sound recording performance right 

currently does not use the same rate standard for all users and in all markets, it is 

entirely inaccurate to argue tlIat IRF A would improve the situation. Currently, 

interactive services are subject to the sound recording performance right, but 

have no compulsory license, PSS and SDARS are subject to the 801(b) standard, 

webcasters, simuleasters and new subscription services are subject to \YEWS, 

and terrcstrial broadcasters arc cxcmpt altogcthcr. A M/FM radio stations pay 

royalties when they "simuleast" sound recording performances over the Internet. 

but pay nothing to "broadcast" them over the airv-Iaves. 

The goal of creating a more level playing field is a desirable one, but the 

IRFA would hardly achicvc that purposc. By lowcring ratcs to non-markct levels 

tor non-interactivc users like Pandora, it would widen the gap betvveen firnls like 

Pandora and interactive webcasters. like Spotify, who arguably are their closest 

competitors. At the sanle time, it would do nothing to reetii}' the imbalance 

behveen terrestrial broadcasters and all other users, as the fornler ,"vould continue 

to be exempt. From an economic perspective, IRFA would not ameliorate, and 

might well exacerbate, the economic distortions associated with the current 

system. 

It is infornlative, in this regard, tlIat IRFA's proponents are unable to proffer 

a policy-based, let alone an economically plausible, rationale for leaving the 

terrestrial exemption in place. For example, the only rationale Villasenor offers 

for not extending the sound recording perfornlanee right to over-the-air terrestrial 

broadcasters is a political one: ""legislation including a provision ending the 

terrestrial broadcasters exemption would be likely to fail.-·l7iJ 

Second, the argument that artists and record labels would be better off under 

artificially low rates fundamentally ignores the economics of two-sided markets, 

in which finns like Pandora act as intenllediaries between consumers, advertisers 

and content providers. In such markets, market rates strike the correct balance 

between the quantities provided on each side of the market. The efficient 

outcome, in other words, is the one that occurs when all market participants face 

would be dramatically lower and would be more in line "vith satellite radio or cahle TV 

Interestingly, Spotify's radio product runs substantially more advertising per hour than Pandora. ") 

110 See Villasenor at 13 

36 
122 

market prices. As the eRE has said, "We agree with Dr. Ordover that 'voluntary 

transactions between buvcrs and sellers as mediated by the market are the most 

effecti ve way to impl~ment efficient allocations ;f societal resources. ",11! 

Indeed. even some of the IRF A' s proponents appear to recognize the flaw in this 

arglmlent, acknowledging that "while rates that are too high can be punitive, so 

can rates that are too low, as they shortchange the content creators on which the 

entire music broadcasting industry depends .. ·

172 It is crucial to remember, in this 

regard, that a significant proportion of performance rights royalties flow through 

to the perfonners. Thus, the cross-subsidies granted to webcasters lmder the 

IRF A ,vould come not just from the record labels, but from the artists 

themselves. 

Finally, the argument that IRFA - by imposing a non-disruption criterion on 

the rate setting process for a vibrant, rapidly changing digital music distribution 

industry -- would enhance innovation!73 is as misguided upon close examination 

as it seems upon first blush. While it is true that "[o]ne obvious consequence of 

broadly applying 801(b) would be lower royalty rates for webcasters,,,114 it does 

not follow that lower rates would cause webcasters to be more innovative. To 

the contrary, imposing a non-disruption standard would protect incumhent 

webcasters from competition and innovation by demanding that rates be set so as 

to provide a guaranteed profit on both previous and new investments. 17S This is 

the stuff of public utility regulation, not the dynamic Intemet, and it would retard 

innovation, not advanee it. As Dr. Janusz Ordover put it in his expert testimony 

in the ongoing SOARS II proceeding: 

[T]he fourth policy factor. should never be used to shield the 

service at issue from the full rigors of vigorous marketplace 

competition. Doing so is likely to harm eonsumers and also 

impede (or deter) entry and expansion of rival services17G 

To summarize, the primary purpose of IRF A, and one of its certain effects, 

would be to produce below-market royalty rates for one elass of online music 

distributors, providing its beneficiaries with a de facto cross subsidy. Further. 

IRF A would effectively lock in the resulting profits by guaranteeing webcasters a 

retum on both existing and future investments. TIle asserted public poliey 

justifications for these proposed market interventions are without merit: indeed, 

the impact of IRF A would be to distort markets, retard imlOvation and ultimately 

deprive consumers ofthe benefits associated with competition and free markets. 

1'1 See SDARS 1 a[4094. 

1i2 See Villasenor at 15. 

171 See e.g., Villasenor at 2 ("It also furnishes a strong disincentive to potential new markd 

entrants and to the inlrodlll:tion of innovative new business modds for delivering digital music.") 

1" Td. 

li5 Again. even the TRFJ\ 's supporters acknowledge this proble111. See e.g., Villasenor at 15 

("[T][ due to technological obsolescence, poor management or other factors, a legacy company had 

poorer EBTTDA prospects than a new market entrant. would the fourth 80l(b) factor be employed 

as a protectionist measure to prop up the legacy company ... 7") 

176 Testimony of Janusz Ordover in SD~C; II (available at: 

http://\v'\'''Y.loc.goYicrb·'proceedinQsi2011- L'pss/sx ,,01 2.pdf) at 5-6 To the extent lovli"er rates 

increased potential profits for non-interactive webcasters, they might attract entl)'. Ho\Never, such 

entry would be of the "copycat" variety, spmNned by the desire to take advantage of the arbitrage 

opportunity created by belmv-Illarkef mtes. 

37 
123 

IEFFREY A 1',T~El\AC;H 

VI. SUMMARY AND POLICY RECOMMINDA TIONS 

The current sound recording perfollnance right is imperfect most notably 

because of the distortions associatcd with the fact that it does not apply to 

terrcstrial broadcasters.177 Over the course of nearly 20 years, however, Congress 

has moved gradually in the direction of expanding the sound recording right and, 

in so doing, increasing the role of market forces in allocating the economic 

resources used to produce, distribute and consume musical entertainment. As 

long as government remains enmeshed in the process of setting rates, there will 

be calls from interested parties for Congress to intervene on their behalf. Such 

calls should be seen, however, for what they are, and resisted. There is no public 

policy case in favor of the IRF A, only a political one. 

For a more comprehensive treatment of the arguments in favor of the sound performance 

rights for terrestrial broadcasters. see e.g, Sunny Noh. "Better Late than Never The Legal 

Theoretical Reasons Supporting the Perfonnance Rights Act of 2009," Buffalo Intel/ectual 

Property JOllrnal 6 (Spring 2009) 83 

38 
124 

Mr. COBLE. Mr. Huppe. 

TESTIMONY OF MICHAEL HUPPE, PRESIDENT, 

SOUNDEXCHANGE, INC. 

Mr. HUPPE. Mr. Chairman, Ranking Member, Members of the 

Subcommittee. Thank you for giving me the opportunity to set out 

the reasons why the music community stands united in its opposition to the so-called Internet Radio Fairness Act. The entire music 

industry, and many groups beyond this industry, all reject this attempt to subsidize companies at the expense of artists. Worse yet, 

a bill that claims to seek fairness and parity blatantly ignores the 

fact that traditional over-the-air radio, representing a huge aspect 

of the radio market, pays nothing to artists when it is their music 

that makes radio possible. 

Contrary to what you may have heard, Mr. Chairman, digital 

radio is flourishing under the current royalty structure. As this 

slide demonstrates, the number of such services has grown from 

850 in 2007 to more than 2,000 services today. 

SoundExchange wants to foster that type of growth; it is, after 

all, good for everybody. But we must always remember that the 

statutory license which enables this growth is a tremendous commercial benefit, a gift really, to these online services. It allows 

them to use every sound recording ever released to build their own 

business. The very least Congress can do is ensure that artists are 

paid fairly for this forced transfer of rights. 

Now, Mr. Chairman, there has been a lot of talk about what 

these payments really mean, so let us try to put it in everyday perspective. As you heard Jimmy Jam say, Pandora currently pays 

about one-tenth of a penny to stream a single song. So when the 

average Pandora listener listens for 20 hours per month throughout the entire year, Pandora pays to SoundExchange less than $4, 

less than $4, in royalties for 250 hours of music. 

Mr. Chairman, that is less than some people in this room spent 

on their coffee this morning for an entire year’s worth of listening. 

And remember, that $4 is divided among hundreds of featured artists, background musicians, record labels and others who created 

the music that drives the industry. And this legislation before you 

today seeks to lower those payments even further. That is why over 

130 artists listed in this ad recently signed a letter in support of 

fair payment and against this bill. 

So how are most artists paid now? Current law sets a fair-market standard for compensating artists. Specifically it considers 

what a willing buyer would negotiate with a willing seller in the 

marketplace; in other words, what is the fair market value? That 

rule applies to more than 2,000 digital services. 

As this slide demonstrates, only 3 digital services out of the 

2,000 do not operate under this fair-market standard. Why only 

three, you ask? Because they happened to be in business back 

when the standard was established in 1998. In other words, Mr. 

Chairman, they are getting this break merely because they have 

been around a while. This bill is really about trying to lower those 

2,000 modern services down to a subsidized rate, rather than raise 

the three outliers up to the modern fair-market standard. 
125 

As you have heard, terrestrial radio must also pay for the music 

that drives its success. To paraphrase Mr. Watt, we shouldn’t nibble around at the edges and avoid the biggest problem out there. 

We cannot have a meaningful discussion about fairness if we allow 

the $14 billion radio industry to continue to pay nothing to artists. 

We are thankful that this Committee has recognized that inequity 

by favorably reporting out the Performance Rights Act of 2009. And 

we also want to commend Mr. Nadler’s draft interim first act, 

which seeks an interim solution to this decades-long injustice. 

Lastly, Mr. Chairman, the bill has a litany of unfair and unwise 

provisions that are too long to list here, but reveal it for the onesided, unfettered wish list that it is. So we agree that the current 

situation is unfair, but it is unfair to artists and labels. It is unfair 

that traditional radio gets to use sound recordings for free. It is unfair that SiriusXM, a multibillion-dollar company, pays less than 

the market rate. And it is unfair that thriving Internet radio companies like Pandora want Congress to make artists subsidize their 

business. 

In closing, Mr. Chairman, it is no secret that the music community, like any healthy family, has any complicated relationships 

over complicated issues. It is not often that you see agreement on 

a given topic from artists, musicians, managers, producers, songwriters, publishers and labels, so it is noteworthy when we all 

come together as one voice opposing something like this bill. But 

it is not just us, Mr. Chairman. We stand shoulder to shoulder with 

groups as diverse as the AFL-CIO and the Americans for Tax Reform, the NAACP and the American Conservative Union, SAGAFTRA and AFM, and Citizens Against Government Waste. That 

type of outcry is a clear indication to Congress that this bill is bad 

policy and would make bad law. Mr. Chairman, we want Pandora 

and other digital services to succeed, but the law must ensure that 

artists are treated fairly in the process. 

I appreciate the opportunity to testify today. We look forward to 

working with Congress to develop a comprehensive approach that 

treats creators of music fairly and all music platforms equally. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Huppe follows:] 
126 

Statement 0 f 

Michael Huppe 

President 

SoundExchange, Inc. 

before the 

HOUSE COMMITTEE ON THE JUDICIARY 

SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION AND THE 

INTERNET 

"Music Licensing Part One: Legislation in the 112th Congress" 

on 

November 28, 2012 
127 

Chairman Goodlatte, Ranking Member Watt and Members of the Subcommittee, I appreciate the opportunity to 

appear before you to discuss the importance oftme parity for all radio services and the adoption ofmles of the 

road which ensure musicians are treated fairly. Ultimately. the question before you boils down to this: Should 

artists be entitled to a fair market price for their works. which fonn the core input of digital music services, or 

should they instead be forced to subsidize services that exploit those works for their O\\'n commercial gain? 

[ am Michael Huppe, and [ am the President of SoundExchange. SoundExchange represents more than 70,000 

artist and 24_000 copyright mVller aCCotUlts. SOlUldExchange administers the Sk'ltutor:v license for digital radio 

used by services rcaching more than 100 million Tnternet radio listeners and 23 million satellite radio subscribers.l 

Tn fact, more than 2,nnO digital radio services - like Pandora, iHcartRadio. SiriusXM and Music Choice - rely on 

tile statutory license everv month for the rights to the souud recordings tllat make their businesses possible. 

Without SOlindExchange serving as the "'one-stop" administrator for the statutory license, they \vQuld all face the 

difficulty and expense of locating and paying each of the thousands of copyright owners \vhose sound recordings 

they 'want to use 

Our operations are overseen by a board of directors comprised of representatives of those on whose behalfv·ie 

work - artists and record labels (both major and independent) - meaning that our focus is maximizing the 

distribution of royalties to those who have earned them. We have built state-of-the-art systems that arc always 

evolving, and we maintain onc of the lm·\,est administrative rates in the industry - 5,3 percent in 2011, Our 

payments to artists and record labels are based on an open and transparent process supervised by our joint board. 

and yve've paid out more than $1 billion in perionnance royalties to artists and copyright owners since our 

lllceptlOll. 

In my testimony today, 1 wish to discuss four topics: First, the statutoIJ·license \yorks best when it results in the 

fair compensation of artists and record labels_ \vhich_ by dcfinition means that they receive the fair market value 

ofthcir recordings. Second, there arc a number offundamcntal problems \vith the so-call cd Tnternet Radio 

Faimess Act (H.R. 6480) r'TRF A") - a bill tilat departs significantly from the principle of faimess which must be 

the toundation of the statutory license. 111ird, 1 want to shed some light on the real economics of 1ntenlet radio to 

shO\v ho\v much of the rhetoric has concealed the reality of the statutory regime_ and demonstrate that the system_ 

including the Copyright Royalty Board ("CRB"), has worked well and exactly as Congress intended 

1 Edison Research and Arbitron, "The Infinite Dial 2012/' available at 

t;.ttRj/~1c~VJ"-~dj?Qnr~5~~Lch.~9~lJ/hQrn~l~cll:c.hJY~5a9J~~LQ':'1/tJl~-tl]fiJ~jte_-:g[al~Q_ll:!J~'{iR.§tJC[':~_9jgt~t-QJ.a:tfQ[t11s,pJlQ 

SiriusXM's 10Q report for the quarter ending September 30,2012, available at http.!!investor.siriu5xm.corr!i2ec.cfm. 
128 

Fourth, and finally, I discuss the "elephant in the room" ,,,henever we are talking about performance rights for 

sound recordings, Namely, the fact that terrestrial (i.e., over-the-air) radio is required to pay nothing for the sound 

recordings that drive its business. TRFA ignores this glaring injustice. Representative Nadler's draft bill. by 

contrast, both seeks to establish true rate parity and takes the first important step to\\ard reetifving this major 

defect in U.s, law, 

1. The "willing buyer/willing seller" standard is the proper standard to determine the royalties to be 

paid by Internet radio services. 

The willing buyer/willing seller standard is proper as a matter of principle, and complaints regarding its 

application to Pandora and other Internet radio sen1ices arc both inaccurate and grossly ovcrblmvll 

o. Tfthe law is going to give services the right to use sOllnd recordings, at a minimum lite law 

should ensure tltat creators receive market value for the use of those recordings. 

At its essence. a statutory license involves the forced surrender of property at the direction of the govemment so 

that third parties may use it to build their business. The owner of the property (the music) has no say about \vhieh 

sen'iees get to use it. The ovmer has no sa:y over the conditions of its use or the timing of \yhen it will be used. In 

essence, the o\vner does not have the ability to withhold that right from anyone seeking to usc it for any purpose, 

as long as they meet the requirements of the statute. For instance, from the moment Pandora started using the 

statutory license. it had more rights to the repertoire of artists like Adele. Metallic,,- AC/DC or the Black Keys 

than did Spoti~', which had to directly license music for its on-demand service. 

Tfwe are going to have this mandatory surrender of property. the least \ye ean do is ensure that creators receive 

fair market value when their work is used. 

The willing buyer/willing seller rate standard is the best way to fairly compensate creators because it is a sk'Uldard 

that ensures that the eRB \"ill base its decisions on actual market evidence. Tn practice, of course, there is no 

actual market for noninteractive digital radio because the "market" is distorted by the existence ofthe statutory 

license itself Instead, the CRE has considered evidence of market value deriyed from uther parts of the digital 

music industry that are not subject to a statutory license. Tn these referential areas, there are sophisticated and 

willing buyers engaged in amls-Iength negotiations with sophisticated and willing sellers. TI,is is exactly the type 

of marketplace evidence on which the rates for the statutory services should be based. By relying on evidence of 

freely negotiated agreements in the market outside of the st.:'1tutory license. the CRB also gets the benefit of the 

market's assessment of the \vide variety offactors that arc taken into account b:y parties to those negotiations 
129 

To be sure, there is no \vay to replicate an exact market price through ajudicial proceeding, but the current 

standard at least ensures that the eRB will attempt to set a rate based on what parties in non-statutory markets 

have done - thus getting as close as possible to ensuring that artists are being paid a market rate for their work. It 

is, in short, the best wa) to detenlline a fair market price \\ ithin the statutO!} regime 

b. The claims that the currellt rates are "too high" are wrollg, overblowlI, alld based 011 all 

incomplete and premature record. 

L Pandora -s rate is not Sk'1tutorilv set at 50 percent of revenues; it is a per-perfoffilance 

floor against 25 percent of revenue 

Pandora's founder, Tim Westergren, has been making the argument that because Pandora -s royalty pa:yments last 

year anlOunted to 50 percent of its revenue and SiriusXM -s royalt:y payments last year amounted to 8 percent of 

its revcnues, Pandora should pay musicians less. 'Vhilc Pandora's description of its effective royalty rate may be 

technically accurate, it is misleading in several respects 

First, the current rate for non-subscription streaming under the Pureplay rates used by Pandora is a fornmla: the 

greater of25 percent of tot a! U.S. gross revenues or a per-performance rate of $0.00 II. rising to $0.0014 in 

2015. This means that at its current $0.00 II per-performance rate. Pandora would owe only $4l'er year for every 

user \vho listened to Pandora for 20 hours (I month. 

Pandora' s statutor~y royalty rate is thus not 50 percent of revenues. The f .. 1.ct that Pandora may currently pay 50 

pcrcent of its revenues in performance royalties simply reflects Pandora's (deliberate) choice to focus on building 

its audiencc - and thus its usage - ,,,hi Ie kecping its advertising load and subscription fccs lo,v. This is not an 

uncommon path for Internet companies to take. Like many Internet companies before it, Pandora has focused 

tirst on building an audience, gro\'dng its user base, and promoting its brand It has only relatively recently 

focused on monetizing its audience. 

A perfect example of Pandora focusing on gro\\ing its user base instead of re\·enue is demonstrated in a fee that 

Pandom used to charge its non-subscription users. In 2009. Pandora began to charge "heavy users" in any given 

month a supplemental fee. Under this policy_ if a non-subscription user chose to strcam in cxcess of 40 hours in 

any given month, that user would be assessed a surcharge of$0.99 for that month. Pandora elected to cease the 

fee in September 2011. presumably because it was a disincentive for users. In other words, Pandora placed a 

higher priority on gaining and retaining listeners than on eanling revenue. 

4 
130 

Tho"" =) be nOllling mhe",,,tl)' \Irons "it h th""PPmaci, Mall)' ton'p"";",l,~, ~ followed a5lmil", path. and" 

" . ,n :u,~ ~"""' . P.,lIlo",·, clIoocc .0 do.c""u"" "h:u D.o,;nc •• "'<>del il dl"Cill 10 follow l3u. i1 I, misleading :ulll 

mappropr>:ue to JUgj,""s, th:u bcQ~ P:uodolll h;os ci>oscn a p:uh "hleb proon"lCl gl'l)\\""8 'Ii h.,,",,,,, ~ o,'cr 

81'1)\\"01l- n;,·"UOCII .• h"" mUl-ie,onslbould therdon: bc fon:cd 10 .ubs,di.x: ns clio,,,,, 

,. , P;,ndora', PHSlMm iil!< ',xlu.:Iii)· much lo"~r Ihao IIIi CO!,,~ 

P:utdo", p:l~'$ a much lower pcr,.;.",:un IlI!c '''ISU. Hscom"'cmal mml't"'''''' "'''" amollg 'iIo<c thai ote&QIialC\I 

ratcSralber I~ hal e ,''''''' Soli tw the CRI3 - p:tt1ic. such as SinusXM and the N • .,OJUl ASSOC"",i",, of 

Broadc:JsIcI!l ,"NAB') , Tu illu5lr:l1c, y", 1() 13. thcdcfuul, rommCre'1i \\cbCl."",g "lie sc. b) the CRB, 50.0011 

pcr"",am. i. ,"" """",as the ""goIial.:d rat" for SinusXM...,d Im,erihan the nCgpiJ3'oo ""e \I,th.be NAB 

(SOWn pcrSl"':U") P(lnOOra. hcme'"I'r. 11',11 0111) pal' $OJlO ll per SttC3JO- n:pr=o!lng" discOlllrl ofO"cr ~(j 

pc",,",n from ",ha' chese ot/Icr SCnlCCS p:lY 

2013 Performance Rely"lly 

Ii 

I 

L 

n,porun~l . f':Indo<:\""lcbr:llcd the"" rale$ just,h"", 1"1'"'" ,,&0. ,,,,,,,,:d,.,01)· follow '"8 "'" 3",,,,,,nccn,e,\I ofthi.' 

Pun:play r.IIC5 Iha, bocamt 3'";l,13ble pumt:lnl ,0 the Wlobc:l.,er SeulcQlcn, Ac, of 200>l SJ>l:C:'fic:d ly. Tim 

Wcs<crsrtn ~<cl ... mcd !ha,'be 1'I))"3i<) en .. " 100"C'· and lb.1I - Pa"""'" ,s linall) QI1 .... fe ground ''''h a lonjl'<oml 

ag.rccmcn' for~u"'''3bJ~ r()yru,~ ",,,,. . ., A crihoai oon,P<l"cn, oflhe Pu",pla~ mle, and 'O""S. as ... oll 3$ tho 

>ehkmcn!:I ncgoll3loo ",,10 Ihe NAB, SonusoX M, 3nd Ihc D!m:r 1"111,<"5' 10 1111: WCbcasicr s"ulcm<n1 Ao! deals. ""S 

,hal '001 lien: IlOl 001) for 'h" poor p<lnod ,- ,be Wd,,:asMg II prtICCCdinl!. - m., ,he)' IIcre f"",anll"";',nsas 
131 

woll. c",,,nnll Ihc period ~1.1I II"" the ""bJ"':t oflbe WCOC:t>I;ng III pr""",'<!,"lI In other \lords. and:t> ~ ",suh of 

volumary ""nlel"""lS "<IIonlllll<.' p.1M;eA. SoundEl<ch""g<.' ..,nlcJ \I ,th more th:uI 90 pereell! of the wcbcashng 

.ndusu)' iH!/VN lbc Wcbo::t>1'11S III IlIlC C3S<: n:~Il)' SOl und~,"'~y In faeL We ncgOlI::Ucd t:IIc5 ""th tho NAB and 

wllh S;nu.XM (for \\c\lCasting) Ihal wcn: '" the 5:10", ""'g" as the martel me. malth~ e R. B ullim::ucl)'adopIc<l. 

Thu~. the argum.", advanced by""",,. Ih::u dIC $t.:llmo~ s)J1cm "13k .. IIlmlX'$"iblo for ""MIt:510 """'h 

Jehlcm.nl.,. no! onl~ ".moll - " ,"cl<aCIl} b....,~~\,n1 •. 

UL h lSOOo,oori"!c fordi.ita! muslc SS: lYlm 10 pill' awbsWlh31 oon,Q!I oflb.;r 1\'\£!luUQ 

thc ",u"PWI! lhaL",j!l;c lh" "en'ces poulblc jg!b£ firs! pk 

Pandonuul\llCSlS tiI,1 ,IS ",. .. :m: OUI of sle p "ith me norm \>.uo:d on a COnlpanson of ,tS QlC8 10 tho: belowIl\3r1<ct ",w, enjoyed ~ Sinu.XM In fan. howe' .... '. it " SinusX~ s ""OS ,,·hich are OUI ofstO!p wilh tile 

markctpl:tCC_ gn ...... ,he fact Ihal otho:, compo,mors In ,"" dIgItal n"'Slc marl<olpl:>cc arlually pay more In ",~aJlIc, 

",Iall..., IQ ",v,"nues If one looks- al <Ompc\ilQrs IQ /'ando", like Spoe,j)' Qf ,Tu" ... 'hc ral,O of cost '0 "",'>'""uos 

for 1'3000111 ;scelt:';nly \"~Hn indllll'~ nOnn. A. ,h" ChM t..loll denlOO",o1<'" 5p<xi(I"s and iTWlC.· CO!l' f...-

cootenl (I.e thd,m:,," "'pul, 311.' "I'Pro~,,"mdy 70 PC"""" Q(thell ""enuC8 - &"""",II3U"g d':Ulhecrr,'CII\'c 

pem:n",lII' of """nu" r:ti<: Obolol" hiclt l':u,,1011l oomp!:tins IS ,n f3CI pcrf.",dy COO.iSlcnI w,d, the- 00lle<>m<:- ,n Ihe 

P"V,O(c m:"'\;Cl 

Royalties as Percentage of Revenues 

_ •. __ .......... ", 

Ag:un. I mUiI cmph:t>lu. \I hen J :;en"oe', "n,ire b ... ''''' ... s dcpcncl1; QI'I musIc (or:ll1,) single '"pu'l. Qnc ""'uld 

e~pccl m.sic (or tlI3l ,npul) IQ 1\.'C~'.-c3 sobSlanI,i\l P"'" Qflh.: 1I:"~n"CilCn,'r:ucd 'oJ 'hJI busino:ss. In f:><-t. Ihis '" 

t) p'<::lll~ IhI: QU'~OOl. on lbe n,,"'e, 

• 
132 

IV As Pandora and other \vebcasters monetize more effectively the effective percentage of 

revenue ,vill drop. 

Whether Pandora's costs relative to its current revenues are higher or 100ver than its competitors, it is interesting 

that Pandora has been making this "disparity" argument - not only because it is misleading - but because Pandora 

made a conscious business decision not to maximizc rcvenues ill the early stages of its business. Pandora 

follo\\ed a purposeful strategy of prioritizing the number of listeners O\,er maximizing revenues. It initially 

decided nol to run man)' advertisements. and its audio advertising load is still very low. It decided nol to charge a 

monthly subscription - not even 99 cents - for its services to most listeners. It decided not to charge users a small 

fcc for downloading its mobile device app (as many se"ices do). but instead to give it away for free. Pandora's 

strategy has so far been successfhl: it was able to undertake a successfhl [PO in lOll and currently sits with a 

market cap of$1.3 billion (as of November 21,2012). And as I mentioned earlier. it is not SoundExchange's 

position or intention to dictate to Pandora hmv to run its business 

But for that samc company to run to Congrcss - after ha,,-ingjust raised an enormous sum ofmoncy in a 

successfullPO - and ask for a hand-out is an outrage. Even nm\". when its shareholders are asking the companJ 

to shift strategy and focus more on revenues and profitability. Pandora only runs about 2 to 3 audio ads per hour.' 

and recently many oftllOse ads appear to be filled ,vith calls to action in cOlmection ,vitil IRFA. Similarly, Clear 

ChaJmel has announced that it isn't going to run M} ads at all on iHeartRadio until at least April 2013." To be 

clear. we are not suggesting that Internet radio services need to run as many advertisements as traditional 

terrestrial radio - or even that the:y have to run advertisements at all. Indeed, the nature of Internet radio is such 

that there are many ne,v and creativc \va)Js to monetize a sen,-iee beyond ad,,-crtising. And even for the 

advertising, the mechanics and functionality of Tntemet radio services means they have the potential to run better, 

more e!Ieetive. and more lucrative advertising once they tap fully into tile market. But whether it is aJl ad 

supported or some other revenue model, tlle statutory license must have a fair market philosophy in order to drive 

sen'ices to build a business that fairly compensates artists. If Pandora chooses to focus on an ad supported model, 

that choice should not mean that artists rceeive lcss than they arc due 

We believe in tile future of advertising supported Internet radio. but ifIntemet radio compaJlies choose to 

prioritize number oflistcners over revcnues at this stage. there· s no reason the artists and copyright owners on 

whose backs the new services are built should be forced to subsidize til at strategy. 

v. Intemet radio is on the verge ofa breakthrough - the disruption of traditional radio. 

3 b~tp:fh~ViWJi~m_~R~JilJ~-,--c.QmlArlictej5t9r'ii~J1J4jlQLP~9!~r~-1I)n1l1g-in~TQ-:p]lJLd_QJ~lp?K~j~_-".B..~p~. 

4 b..n.!2:! Jku rthanson .comJng~§~1!jio-custom-5!llic r s-remain-com .!!1ercia 1- fr~e-%22LJ..!!!l!:£2..d 1%22. 
133 

SoundExchange believes that the gro\\1h of Intenlet radio \vill continue, and that Pmldora and other Internet radio 

companies \vill in turn increase their revenues and profits One need look no further than the statements of 

Pandora's cxccuti,,-cs thcmsclvcs 

"'We generate consIderable revenuejrom mobile.l believe 1ve 're one of the biggest mobile 

advertising sites in the ('ouno)'. Toda}/, mobile advertising is more nascent than desktop 

advertising, which took 10 to 15 years to develop, but mobile is growingjill-,tiIster, Key pieces of 

the puzzle, lzke third-party measurement. areju.vt commg in We'll benefit tremendouslyfi-om 

Iha(," Joe Kennedy. Pandora CEO. June 2011 5 

"With now almost 6 percent share of all rCldlO itstenmg tn this country we clre e/focllvcl.y larger 

than the largest AM or FM radio statum in man. v markets in this country and on our way to being 

larger in most markets. What that means is to the traditional radio advertiser Pandora IS a highly 

relevant compelling choice, " Joe Kennedy. Pandora CEO. CNBC, May 2012 

"We've seen tremendous growth in the adoption of mobIle by adverti.'-:crs.lnfact. we more than 

quadnJ.pled Ollr mobIle ad revenue last year from about $25 million to over $100 mlllJOn. " Joe 

Kennedy, Pandora CEO, CNBC, May 2012 

So who are we supposed to believe? The Pandora that tells Wall Street its best days are abead? Or the Pandora 

that is asking Congress to bail it out? 

We think Pandora is fundamentally right about the promise of Internet radio. For example. look at the growth in 

its revenues. According to a report by BIAlKelsey, Intemet radio revenue in 20 I 0 was $410 million. In 20 I I, 

tlmt grew to $440 million. and 2012 is projected to reach $510 million in revenue. Ci Pandora's revenue has grown 

from $55 million in its 2010 fiscal year to $274 million in 2012 7 And more than a year after its successfullPO, 

the company is valued at $1.3 billion. 

Clearlv, Pandora does not need to be subsidized by artists, especially when it is in its infancy and the numbers are 

so promising. Tn light of the relative youth of Pandora as a company, and its projected gro\\th pattern (as 

demonstrated in recent years and lauded for the future years), it would be ill-advised for Congress to step in and 

manipulate the market to subsidize a thrhing and innovative company. 

5 b..t!P....JL..illltb.i.oF..2.d. com '1.011061 U&;E1D.9or<l -h"d-a-.R9..9d-w!,Q.n esday-and-a-terribl e.:.!till.!2Q~~ha~ -il bOll1=. the-f1£lliQ\d..Qht. 

yearsi. 

6 JlItpJj'!j1!!'-W.J?ie!~~1:;~s.J:QJrl/~_qmpEnvl~L~S?~r*i!5_t?c~l.1:Q~~lQ~~'i~9lQ-JJ)Q_ld5trY-Rg'{l~f}Ht;_~-£ia;-:LIJ::_WJJ-,_-YVbil_f:!_~QJlllr~~~ 

Revenl.,Jcs-Jump l's,l-Percent.<:ls[2 

7 Pandora's 10K report for the fiscal year ending January 31, 2012 available at 

http://~9v/ArchiY.lliE.:.~~t1LJ.2301l.§LQQ011..:~31~51J120024/d280023dl0k.htm 
134 

Internet radio, for all its recent explosive gro\yth, is still in its relative infancy, especially \vhen it comes to the 

disruption of traditional radio. Discussing Pandora's currcnt rcycnuc model, based on this :ycar's numbcrs, is likc 

assessing Google in 1999 or Facebook in 2006. If s simply too early to tell "here Intemet radio is headed. but it 

is clear that it is poised for continued explosi ye and tra11sfonnatiw growth. 

11. Any new legislation should be fair in fact. not just in name. and establish true rate standard parity. 

a. TRFA u'ould drag tlte thousands o.fservices now suhject to a market rate standard down to tlte 

helow market rate standard that on(r three services now enjoy. 

At its core, the driving motive behind lRFA is clear. It is, quite simply, an attempt by webcasters to reduce the 

royalty fees that they pay to recording artists and copyright owners for the priv ilege of using their sound 

recordings on digital radio. TIus bill would be a huge step baclGvards - applying a11 old standard currently used 

by only three "grandfathered" digital services (SiriusXM for satellite radio. Music Choice. and Muzak) for their 

performance of sound recordings 

Congress should not be asking whetller 2,000 services should enjoy tl,e perks enjoyed by the tllfee grandt1ttllered 

sen1ices. Rather, Congress should be asking \vhy the la\v forces artists to subsidize successful companies like 

SiriusXM under the outdated 80 I (b) standard - a company that is now silting on hundreds of millions of dollars in 

cash and continues to outperfoml expectations in growth and revenues 

It is important to note that the three grandfathered companies operating under the 80 I (b) standard arc granted that 

belmv-market subsidy merely because they happencd to be in existcnce in 1998 - in other \\ords, because thcy are 

··old." At tl,e time of passage of the Digital Millermium Copyright Act, these companies were given tl,is 

exemption based upon a them),' of business reliance. While \ve might dispute whether this theory \\"as justified in 

1998, any possible justification for providing a subsidy tc these services no longer has merit following the 

intel>ening 15 years. It should not be the case that 80 I (b) is used to subsidize any company - regardless of its 

size. business model, or degree of success - simply because it had the good fortune of existing in 1998. 
135 

Willing BUYllrJ Willing Seller 

Standard WI)rks 

Wouldn"t t"", f:!lmess' · dictate thai Si",~XM 311d !h~o!hc, mo ··gr.>ndF.uhcn:d·· .. ",ire!; s'mpl~ "") III !he 

modem fair nI.3~! ,,,10..: stUld"rd? Tlw is!he F.nI"Cst. mos! c..,.,.,..,...(raUl"""nd ""th to !n,erolt.sland3rd p;>ri!) . 

" goal wh,ch Sound!;.,ch",,!!" S.'PI"'o1S 

"T"ho "Clin gool Or!/le I RF A, ""~,·",, .s r.;dic;o.Uy diffe",nt. It ,, !o lo,,"crtbc t:l\c "",,<bnl fm ill dig;t:tJ sen ,,' ... 

down !I) !he: 3ntlqu:ucd bclo,..·m':II1<CI r.:ue. ,whe. th.U! rcqumnl/, ,h,u all !il." fV!Ci.~ p.:I). aJ Ihe mO", rca5On:J.ble raJ, 

nwt.ct rlIlc Thi:l ,sn', "f"r:"" il" pn."<!:uOI) - p.:Irlicul3rir \lhon lOU ~s.idi."1h.1'lloc I ... ;>Ilo", diS'1.l1 mdio 

""" '''''S In build the" buson,,"SC5 OfT.!"I!U- """",,,,.e,all) ava,lable wort. withoul ",usle cn:wors" ",..-ing the abil,{y 

{O ""hl\old A, ,bc ''''Y leOll!. !ht la,," s/o.ould "'quln: lIla{ those ~1C;ll0t$ b.: co,""pcn.salcd:u a f"" In:uI:e! "u~ 

LC\ ", talk abou1 "lor i{ ,s nOl "J!llropriatc far Pandrua (and other " ..... Id.o;, champions of {"oo'"3Iion and 

(CcllllOlogocaJ disrupllo,,) !o be supp;.>n"'g the arll''I",,!<"d ~O I (to) ~:ond.:"d , The $0 U b) Sl3I\datd fa. Ot$ old 

!cclloolog)'oler neW IcclmolO&) It al!OO fu·,·OrlSlnlusqoo o\"er ,"'''''111'011 b) ;!.lIo","s{!>.; eRa It! InSll13le 

P""do", ""d othe. In{eruc! r.;dio .. " ,ces fn)ln tho so.;:allod ··d'I-Np"'" 'nll""1" of rnam:! roIos. 

II ,s "on'e lh:u Pandor:! and OIho .. ,~ lhe!el:hnoIOSl' ,,"orld!lOw:l5k tht governmem (O S{<lp In!o protttlll>enl 

from the COMCqum""s of 11o~ mar!;ct UnJ",!he 3I\{,qll3lcd O l(b) sl.lndasd. "h,eh P""do", """ks. IIoi: eRB 

Judges an:d;n'ct.-d 10 "'" "'" = "'-"t"QrdinlllO the foll"",ng cnleM. 
136 

(A) To maximize the availability of creative works to the public 

(B) To afford the copyright owner a fair retum for his or her creative "ork and the copyright user 

a fair income under existing economic conditions. 

(C) To reflect the relative roles of the copyright owner and the copyright user in the product made 

available to the public with respect to relative creative contribution, technological contribution, 

capital investment, cost, risk, and contribution to the opening of nc\"'.- markets for creative 

expression and media for their communication. 

(D) To minimize any disnJ.pfive lInpacf 011 the structure of the industries involved and on 

general(v prevailing industry practices. (Hmphasls supplIed.) 

That last factor bears rcpeating - '"to minimize any dismptivc impact on the stmcturc of the industries involved 

and on generally prevailing industry practices." The IRFA \\ould extend this protection against "disruptive 

impact" to every online radio service taking advantage of the statutory license But don't this country' s most 

imlOvative companies embrace "disnlption'(' 

Look at what this country's technological leaders have said: 

IIOne olthe thmgs about technologJ' IS that te<.:hnologJ' lS fundamentall), dlsruptlve and m)' 

experience now, and I've done tlllsfor a long time, is that people are alwa)'s shocked at how real 

disruption occur.v and how much change can occur through empowerment, 1/ Eric Schmidt 

Google Executive Chairman. October 20 I 08 

'~s a company, one of our greatest cultural strengths IS accepting thef(J<.:t that ~l'you 're going to 

invent, you're going to di.mll't, " Jeff Bezos, Amazon Founder and CEO, November 20 II.' 

"Wtred ~t'osfounded on the notton that change ;s good Disruption is the ultllnote change, II Chris 

Anderson, Wired Editor-in-Chief, May 2011 1 <' 

And Pandora has follovv·ed suit, emphasizing its role in dismpting traditional radio 

"We have the audience to massively disnlpt this market, " Joe Kennedy. Pandora CEO. May 

2012. II 

"We nmf!jind our.'.;clves at an excltmg moment. at the Cll: .. p l!.l a substannal dlsnlpnon m one of 

the largest consumer media categories radio," Joe Kennedy, Pandora CEO. I: 

"Pandora lS tran.~formmg the last medIUm yetta be dlsrupted by the internet. 'J Tim Westergren, 

Pandora Founder and Chief Strategy Officer13 

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11 
137 

But \vhile Pandora champions its o\yn disruption of the consumer media industry to Wall Street, it wants 

Congress to protect it from the ostensibly '"disruptive" impact of paying fair market ,alue for the music it plays 

Arguing for business progress \vhile at the same time seeking to minimize "'disruption" through artitlcially lmv 

rates for its own use of music is inherently contradictory, After alL iImm,ation is based on disruption. And 

capitalism rewards disruption. Pandora and those from the teehnolog} sector who support it should not be able to 

glorify disnlption when it suits them. and yet bemoan it \vhen they are seeking a subsidy 

c. lRFA contains a litany of other unfair provisions dearly designed to tip the balance decidedly 

in favor of internet radio services. 

Just as bad, the bill anlOunts to a w ish list for copyright users. with a host of one-sided provisions that would 

politicize the CRB and impose limits on copyright mvners' and artists" ability to participate fairly in rate setting 

proceedings. It would also require the CRB to base its decision on evidence that doesn't exist and ignore 

available evidence of how the market and the music indust!) actually works. 

To name just a few of the troubling provisions proposed in this bill 

The requirement that at least one judge should have expertise in economics would be eliminated, even 

though the judges arc supposed to be setting rates based on market e,·idenee. 

The ability of copyright owners and artists to effectively participate in rate settings, and their ability to 

speak freely about critical public policy issues regarding the statuto!) license. ;;ould be radically 

hamstrung. 

The bill would inexplicably place the burden of proof solely on copJTight owners and artists 

Nonnal and customary market benchmarks. such as rates paid for oll-demand services, or any rates agreed 

to by major record labels, 'would no longer be usable as evidence. even though that is the best evidence of 

ho\v the industry actually \vorks. 

Marketplace evidence would be limited to agreements that do not currently exist or shed light on the 

market 

TIle bill would impose new. one-sided burdens on record companies and recording artists in the mtesetting proceedings 

Copyright judges would need to be confirmed by the Senate rather than appointed by the Librarian of 

Congress. exposing the rate-setting process directh' to electoral politics. 

13 l"Lt;Q"/ !WWYi: l~\l?~j""(l?B~g.LC~-,-cQJIllQE!lJ rrQr~I!l~m_ .m~QLl![l:l __ ~J:.Q_~~lJ.1i)l_J~rm_-:l.£1 n).).£.J:ttrn SQllJf~ -={laXtqQr3J~~l)tt11.. _ C.~!1)Q~ ip;~ ~ ~ 

ilrtide 

12 
138 

Indeed. it is these provisions (and more) that in many ways reveal IRFA for what it is a wish list for the digital 

music services completely unmoored from any principles of fai mess. 

III. The reality instead of the rhetoric: the Internet radio industry is thriving under the current 

statutory regime. 

a.. The statutory license has enabled tremendous grOlt,th, in parl, by prupiding services a "one stop 

.'hop" for .wund recording right.,. 

Congress created the statutory license for digital music to make it easy for wcbcastcrs or satellite radio to pay for 

the music they usc to operate their businesses. As a result, these digital radio servlces do 110t need to negotiate 

individual deals with thousands of rights holders and recording artists - or ask pemlission to play eveI) track 

TIus is an incredible gift tor online music services, and Pandora itselfhas confimled that it depends on the 

statutory license fOf the rights to the sound recordings on ·which its entire business is based. For Pandora and 

other entrepreneurs seeking to start a digital music service. the statutory license provides an eas:y and quick 

method of obtaining a license and paying royalties, The statutoI)' license gives these services the right to streanl 

ever,"" sound recording ever conllnercialh released. merely by tiling a short document and meeting the temlS of 

the statute 

SoundExchange, as the steward of the statutory license, thus offers a one-stop shop for sound recording rights 

Not only does the statutory license eliminate the need to seek thousands of license agreements: the collective 

management of the license by SoundExchange eliminates the need for services to make thousands of separate 

payments and deliver thousands of separate reports to copyright owners and artists. 

The growth of digital radio services using the statuto,,' license is astounding, Digital radio is an increasingly 

substantial portion of all radio listening in this countI). and. as we have stated above. today more than 2.000 

music services use the statuto!}· license, representing tens of thousands of individual channels and stations. These 

2.000 senices represent a huge increase over the past five years (see chart).'" and are a testimony to the benefits 

that the current licensing regime provides 

14 Based on number of services reporting to Sound Exchange, with prior years adjusted to account for broadcast industry 

consolidation since 2007 

13 
139 

Digital Radjio Continues Growth 

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()Ih~r ,.()Urca; if rc<·eftU" ii,'" ~hri".jllJl. 

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ro)3In05. Thissplil 1I'a. built ,n,o the 10" III n:.pons.: to tho dr"nsoflhc art,st' unions, AFM and AFTRA (noll 

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" 
140 

n\Caning Ihal lhe ;"nsts keep 100 pert:l:nl of the'r digil~l r.ldio m~""hy n:ga.nllcss of whelher ther an: recouped 

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mcan,ng(ull~ p:tn""p:tlt '" Ih~ downWtam rtc,'CnuC opponun,loC& from (lus I>Cw:ond gmw'l\g ",,'"CnUCllOUttc 

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bu1 II dl$lnbulesth3l income 3CfO§sa l:vgcr ""d largor nUlnbcrofrcclplenl5. 

Performanc,e Royalty Splits (by law) 

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Prrform.Mf Riehl 

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thai does "''' "'C<lgniZC3 NlP}·righl for lhe p"rl'OmIMCC oflOUnd """,rdings forlCm:Slriallr;ullimi .. ,on., E\-<:IY 

mu<ic plalrom •. ,,,cludin!1."'r,,,,tri~1 r.ldio. ,,""uld pay a perfonn:mco.: roy:oll} 
141 

A bill aimed at genuine fairness must necessarily address this omission in U.S. law. Legislation that maintains 

such a glaring inequity on onc ofthc music industry's biggcst performance platforms is hardly "fair" at all. 

b. Prior bills, and current draft legislation, are a move in the right direction. 

In order to create true parity and fairness, Congress must create a legal performance right for sOlmd recordings 

played on ;ill platforms - and most importantlY terrestrial radio. 

In that regard. I want to thank this Committee and former Chainnan Conyers for favorably reporting on a 

bipartisan basis the Performance Rights Act in 2009. Many ofthe stalwart supporters ofthat bill arc here today. 

also want to tllank Representative Nadler for working on an interim solution to fuis decades-long injustice. 

Representative Nadler's draft legislation recognizes the injustice of denying "fair pay for airplay." His discussion 

draft proposes a 21st centur:y marketplace standard that treats artists and music services fairly and equally and 

takes a step toward remedying the lack of a performance right for terrestrial radio. Specifically, his draft bill 

would not only adopt true rate-standard parity - establishing the '\villing buyer/willing seller" standard for all 

digital music services - it would also take a first, important step forward toward correcting the decades long 

injustice of the absence of a perfonnance right. While Representative Nadler's draft would not actually create a 

terrestrial performance right it 'would require broadcasters \vho also simulcast their terrestrial streams to pay a 

surcharge that reflects what the market value of thei r over-the-ai r broadcast 'would be if a terrestrial perfonnance 

right properly existed. 

SoundExchange agrees with Represent.:'ltive Nadler that the current lack of a perfomlance royalty for terrestrial 

radio airplay is a significant inequality and grossly unfair. Indeed, it is arguably the single greatest injustice in the 

music licensing landscape today. \Ve cannot condone a race to the bottom \\hen it comes to rate standards and 

compensation for artists. and \\e applaud Representative Nadler for providing a discussion draft that would 

provide artists with f..'lir compensation for the valuable creations they share 'with the world 

111is is an exciting time for music fans Radio is being transfomled as we speak But the lmv should not 

lose sight of the fact that these services are nothing "ithout music. and that it is the musicians who give life to 

Pandora and its peers. If you are going to force creators of music to relinquish their property, they at least desen1e 

a market rate for their work. As musical artists like Rihanna, Billy Joel. Maroon 5 and Sheryl Crmv stated in their 

message in Rillboard magazine earlier this month~ let's not gut the royalties that thousands of musicians rely 

16 
142 

Mr. COBLE. The gentleman’s time has expired. 

I want to thank all of the panelists for your time and your presence here today. 

In 1998, there was some question as to how the DMCA was going 

to affect Internet radio. A series of stakeholders meetings were convened, and the net result of those meetings, you will recall, was 

willing seller/willing buyer. 

Now, Internet radio has enormous potential for music lovers, the 

music industry and high-tech industry, but in my opinion it does 
143 

not replace the rights of creators and performers. All three, it 

seems to me, should flourish. 

Mr. Kennedy, let me put a two-part question to you. Is Pandora 

profitable and successful without changes in the law, A; and B, how 

does Pandora generate revenue, and does that include capital generated from the stock market? 

Mr. KENNEDY. Forgive me. I hesitate to frame this as a Pandoraspecific issue. As you heard from Mr. Hubbard, the rates that exist 

today in Internet radio prevent every broadcaster from entering the 

market or, for those that are there, from making any profit in the 

market. So we don’t really view this as a Pandora issue. 

The amount of money we pay, almost a quarter billion dollars a 

year, is more than the performance rights paid by the entire radio 

industries of the U.K.—which includes AM/FM payments—France, 

Germany, every country on the planet. 

So I don’t think this issue is really about the profitability of Pandora. And to the extent the profitability of Pandora is relevant, 

then 801(b) is really the appropriate standard, because it is the 

standard that directs the judges to take into consideration the financial conditions of the companies involved. Willing buyer/willing 

seller makes no reference to that. And so if you believe that it is 

a relevant consideration in rate setting, then we certainly would 

say 801(b) is appropriate, and let the judges completely examine 

the financial performance of Pandora and every other licensee 

under section 114 in making their determination of appropriate 

rates. 

We generate revenue by a mix of advertising and subscription, 

really the way radio has generated revenue for many years. As Mr. 

Reese talked about, ad-supported radio is the foundation of the 

radio experience in America, has been that way for roughly 100 

years. SiriusXM is a subscription model. We offer both of those 

business models to consumers. Part of the benefit of the Internet 

is the ability to give consumers that choice. 

Mr. COBLE. I thank you, sir. 

Mr. Jimmy Jam or Dr. Eisenach, many established artists, I am 

told, have signed a letter to Congress opposing this legislation. 

How about up-and-coming artists; does it affect them as well? 

Mr. JAM. Sir, I would say that it probably affects them even more 

so. 

Mr. COBLE. Mr. Jam. 

Mr. JAM. The green light is on. Maybe come a little closer? How 

is that? 

Mr. COBLE. That is better. 

Mr. JAM. That is why I am a producer and not a singer. I know 

how to set it up, but—— 

Mr. COBLE. I bet you do both pretty well, Mr. Jam. 

Mr. JAM [continuing]. I leave it to the talented people to do it. 

The ad actually includes a lot of people who I think would be 

thought of as up-and-coming artists certainly, but, yeah, it affects 

everybody across the board. And I think that, you know, part of the 

reason that I am passionate about it, and I have been fortunate to 

have a lot of success in the industry, but to me it is important that 

it continues on. 
144 

And it is really simple to me. When we talk about the music 

business, the word ‘‘music’’ comes first. There has to be music. We 

have to support the music before anything else, before the business 

gets done. And I just feel that the idea of lowering rates that are 

already in place and were already acknowledged by Pandora as 

they could function under those rates, it seems a little bit interesting to me that 3 years later we are here in front of you arguing 

that for some reason they can’t make the business model work. 

Mr. COBLE. I want to try to beat the illumination of that red 

light. Thank you, Mr. Jam. 

Mr. Reese, if you would distinguish—strike that. 

Regarding terrestrial radio, how would you distinguish terrestrial from satellite, cable radio and Internet radio? 

Mr. REESE. I think two principle distinctions, Mr. Chairman. 

First is that AM/FM radio is local and free, and that is a distinguishing characteristic from the others, which are at least subscription driven and in many cases subscription and advertiser supported. And we have been there for 90 years. We have been providing relationships with communities. We played with an important promotional role, a multibillion-dollar promotional role, in promoting the music industry. 

It was said by one of the witnesses that music makes radio possible. Radio makes music possible. There has been a terrific relationship there for nearly 100 years now, and we believe the free 

local nature of our business is very important in continuing to 

make music possible. 

Mr. COBLE. I thank you, sir. 

I see my red light has appeared, so I will yield back the time I 

don’t have. 

Mr. WATT. Mr. Chairman, I am going to defer to the other Members and go last in case we run out of time, so I will go to Mr. Conyers. 

Mr. COBLE. The distinguished gentleman from Michigan is recognized. 

Mr. CONYERS. Thank you, Mr. Chairman, and I thank all the 

witnesses. 

I am still trying to determine why artists and performers, whose 

music is played 24 hours a day on terrestrial radio, don’t get a 

dime. And I notice that, with all due respect, the first three witnesses said little or nothing about it, and, to me, this is the—I 

mean, we are not only leaving things at a situation that is unacceptable, but we are making it worse; don’t you think, Mr. Huppe? 

Mr. HUPPE. Thank you, Congressman. I absolutely believe we are 

making it worse. As I mentioned earlier, to attempt to solve the 

problem piecemeal and avoid the biggest elephant in the room, 

which is the $14 billion over-the-air industry, is really a huge mistake. 

You know, it was stated just a minute ago that without radio 

there would be no music, and I believe it was asserted that without—without music there would be no radio. Mr. Reese asserted 

without radio there would be no music. I respectfully beg to differ. 

Music is what drives radio. Music is one of our greatest cultural 

assets. The American music industry, American artists, American 

unions, American record companies are the most popular musical 
145 

asset around the world. It is American music that is played overseas. It is American music that is played in Europe. And the fact 

that we stand alone in not rewarding the artists who feed that 

music to the radio station so they can make their profit from advertising is unacceptable. And I would note—— 

Mr. CONYERS. So our country is the only country that doesn’t 

compensate. 

Mr. HUPPE. It is the only industrialized country that does not do 

it. 

Mr. CONYERS. And pay royalties to those who are performing. 

Mr. HUPPE. It harms performers twice, because not only do they not share in any of that $14 billion profit made every year by the 

radio industry off their hard work, but because we do not have that 

right in this country, there are hundreds of millions of dollars overseas collected on behalf of American artists that don’t ever work 

their way to American artists because we lack the reciprocity. So 

they are harmed not once, Mr. Conyers, but twice. 

Mr. CONYERS. Dr. Eisenach, could you put in some order the importance of the four principles that you articulated in connection 

with this subject matter? What is at the bottom of all of this, if we 

were putting it simply? 

Mr. EISENACH. Two concepts. First, the notion of applying a nondisruption standard to the Internet, I hope everyone would recognize how nonsensical and perverse that is. The Internet is the 

world’s greatest example of the process of creative destruction. The 

Internet works because people come to the table with new ideas; 

they invest their sweat and their energy and their money. Sometimes they succeed; sometimes they fail. They don’t have a right to 

succeed. And section 801(b)(4)—(b)(1)(D) would, in effect, seek to 

give them that right. So it is a recipe for technological and marketplace stagnation. 

Secondly, and this responds to something Mr. Kennedy said, the 

advantage of the willing buyer/willing seller standard is precisely 

that it does not guarantee the profitability of individual companies, 

precisely that, right? This is the stuff of public utility regulations. 

We have rate commissions which are designed to preserve the profitability of our electricity companies. But that is not the kind of innovative marketplace that we are dealing with here. We don’t want 

to guarantee these companies the right to eternal life. 

Mr. CONYERS. Thank you very much. 

I wasn’t going to ask the former head of The Recording Academy 

any questions, but, you know, Jimmy Jam, you come off as a very 

able witness. You are in the industry. Don’t you think that just a 

sense of fairness would require that somewhere along the line—we 

tried it once; I think we passed the bill of mine at least once here 

already—in terms of giving performers some share of all of the enjoyment they are giving to hundreds of millions of people, and everybody is doing it in almost every country on the planet but us. 

Mr. JAM. Right. Yeah. This is an area where it doesn’t really 

make a whole lot of sense that artists do not get paid royalties on 

AM/FM radio. I am sorry, I don’t remember which gentleman it 

was of the experts on this side that basically alluded to the fact 

that there were some private deals that had taken place. We like 

the idea that that has happened because basically it is an acknowl-
146 

edgment that it is the fair thing to do. And those companies that 

have chosen to go into a private agreement, that is wonderful. 

The thing that I would say, though, is that we need an industrywide solution to that problem. And really only Congress can make 

that happen and make it so that—this is actually a letter that was 

written by Scott Borchetta, who is the CEO and President of Big 

Machine Records. So this is one the private deals that was done. 

But in his letter, even though that they have struck the private 

deal, which we think is a good thing moving forward, he does call 

that the idea that the government needs to get involved at this 

point to make it an industrywide solution, even he, as part of this 

private deal, feels that that needs to happen. 

So we would obviously like to see that happen on that side, and 

we want to just create the right that the rest of the developed 

world has. We are the only Nation that doesn’t have that for the 

artists. 

Mr. CONYERS. I am so glad that all of you are here, and I thank 

the Chairman and return any unused time. 

Mr. SENSENBRENNER. [Presiding.] The time of the gentleman has 

expired. The new Acting Chair will recognize himself for 5 minutes. 

Mr. Kennedy, as you know, I have been pretty sympathetic to the 

concerns that webcasters have brought up. And during the 6 years 

when I was the Chairman of the full Committee, the Committee reported out and was enacted into law two changes in royalties. And 

after my retirement as Chairman of the full Committee, the 

Webcaster Settlement Act was passed. 

Digital Millennium Copyright Act established a compulsory license, which I think was necessary to allow this industry to get off 

the ground, but it also said that the license fee should be based on 

a willing buyer/willing seller principle, which I basically interpret 

as saying that it should be based on market principles. That was 

in 1998. 

In 2002, there was political pressure to reduce the royalty payment, and Congress, during my chairmanship, passed the Small 

Webcaster Settlement Act. Then 2 years later we passed the Copyright Royalty and Distribution Reform Act, and the trade association that led the lobbying campaign for the webcasters issued a 

press release boasting that they were thrilled that Congress had a 

passed the legislation, and that the redesigned royalty arbitration 

process will be more efficient and the rates would be more fair to 

participants as a result of the revision in the law. 

Then during Mr. Conyers’ chairmanship, there was another bill 

passed, which was called the Webcaster Settlement Act of 2008, 

and Pandora praised the deal as, quote, ‘‘the agreement we have 

been waiting for,’’ unquote, and, ‘‘Pandora is finally on safe grounds 

with a long-term agreement for survivable royalty rates.’’ 

Now here we are back again, and this is the 1, 2, 3, 4, fifth attempt of the Congress and specifically this Committee to deal with 

this issue. Mr. Kennedy, when is a deal a deal, and you have to 

accept a bad deal as well as cash in from a good one? 

Mr. KENNEDY. Mr. Sensenbrenner, several comments in that regard. The webcasters who were there in 1998 when this law was 

first passed were two fledgling webcasters who are now no longer 

in business. The webcasters who are present in the 2002 and 2004 
147 

time frames that you reference are no longer in business. We have 

not been part of any of those legislative changes. The webcaster 

settlement agreement that we reached with SoundExchange extends through 2015, and we fully sign up to live within the provisions of that webcaster settlement agreement. 

The issue before us is that that settlement agreement expires in 

2015, and we enter a new rate setting for the period 2016 through 

2020 with the system in place that, as you allude to, has failed to 

develop outcomes that are considered by all parties—fair by all 

parties in any of its applications. We seek now to address that fundamental flaw in the legislation precisely to get Congress out of the 

business of having to intervene into these proceedings. 

Mr. Huppe would have the exact numbers, but the overwhelming 

majority of the payments to SoundExchange today from Internet 

radio do not come by rates that were set by the CRB. They come 

as a consequence of settlement agreements entered into only after 

congressional intervention. 

That is not the way the system should work. The system should 

be able to generate rates that all of the parties consider fair, and 

we seek to achieve what Mr. Berman alluded to in the context of 

a symbiotic system, an approach that can truly generate outcomes 

that are considered fair by all parties. 

Mr. SENSENBRENNER. Well, Mr. Kennedy, my time is about ready 

to expire, but let me say that the Members of this Committee have, 

you know, spent probably more time dealing with this issue than 

with any other single issue in the last decade or decade and a half, 

and we have got lots of other stuff on our plate that we have got 

to deal with, as everybody in the room knows. So what would happen if we just said, well, your time is up, we can’t spend any more 

time on this, let 2015 come, and let the current agreement expire? 

Mr. KENNEDY. I think the issue for you to consider is that under 

the rates that are established by the CRB, again rates under which 

very few, if any, services operate, to give you a perspective, if those 

rates were applied to all of radio in this country, based on a study 

by a very well-respected music business professor at Washington 

and Lee University, this study, unfunded by any participant, completely independent, estimated that the total payments due from 

the radio industry under the current rate structure set by the CRB 

would be $4 billion a year. That is illustrative of what the willing 

buyer/willing seller and current CRB process establishes as the appropriate rate. 

I am not aware of anyone who studied this issue who believes 

that the appropriate answer is to charge AM/FM radio $4 billion 

a year, that that would truly represent a fair market rate that 

broadcast radio would be a willing buyer at those rates. Yet those 

are the rates last set by the Copyright Royalty Board. They are 

completely out of line by any standard in the U.S., in the world, 

and in order to establish a system that generates fair outcomes to 

all parties, this system fundamentally needs change. 

The attempts to develop new and different rate standards, new 

and different processes, while undoubtedly well meaning over the 

last 15 years, have generated a rate standard and a rate system 

that, as you allude to, simply have not delivered results that have 

been considered fair by all parties and, as you say, have taken far 
148 

too much time of Congress. It is time to fix that fundamental system. 

Mr. SENSENBRENNER. Well, my time has long since expired. 

The gentleman from California Mr. Berman. 

Mr. BERMAN. Well, thank you, Mr. Chairman. 

It is quite clear that a rate that all parties agree on is easier said 

than done. There are obviously a few people at that table who 

think willing buyer/willing seller is not a fair market rate. My 

guess is there are a few people at that table who think the 801(b) 

standard is not a rate that reflects a fair market value. And part 

of the problem here, as Mr. Sensenbrenner has said, there is great 

value in the compulsory license in terms of getting music out there, 

but it is sort of hard to figure out what a fair market rate is in 

a compulsory license. No one wants to appeal that. 

What is the glaring incongruity in this legislation is to call it the 

Internet Fairness Act when the issue should be sort of the Music 

Fairness Act for the people who create the music and the people 

who deliver the music. 

And it is disingenuous, I have to say, Mr. Reese, for you to talk 

about finding the rate that will incentivize more webcasting by 

radio stations without acknowledging any obligation to be subject 

to a performance right for over-the-air broadcasting. You want to 

talk about parity without discussing the ultimate inequity, the fact 

that over-the-air broadcasters do not pay for the music they play. 

If radio stations want to be all talk radio, they shouldn’t have to 

pay a penny of music performance rights, but when they live and 

thrive and sell lots of advertising—Mr. Kennedy talked about $4 

billion, why that would be unfair to charge to webcasting. Is zero 

fair to charge to broadcasters? 

There is a potential bargain here, even though it is a fair market 

rate bargain, but it is in the context of dealing with all the inequities in the platforms, and without that you are not going to find 

this fair rate for all parties. So I think the broadcasters have to 

come to terms with maybe some of your guys don’t want to go into 

webcasting, and they like it free, but at the end of the day, if 

webcasting is a major part of the future, I think we are at a point 

in time where you are going to have to come to terms with free 

doesn’t work anymore in terms of incentivizing creators and fairness. And so in a Music Fairness Act, it is a huge albatross around 

this legislation’s neck to ignore that issue. 

I understand the Pandora problem. They are not an over-the-air 

terrestrial broadcaster, and they are part of a coalition to try and 

change a standard. But I am predicting that, and I won’t be here 

to determine it, but I am predicting that standard will not change 

in the desire to find that fair market rate. 

By the way, as Mr. Kennedy acknowledged, no one is paying the 

willing buyer, or hardly anyone is paying the willing buyer/willing 

seller rate, it has only been discounted by agreements. I was very 

involved in the most recent agreement back in 2008 and early 

2009. 

But the absence of a performance right for terrestrial broadcasting is what is going to make this a very interesting academic 

exercise that isn’t going to produce a piece of legislation, and we 

have to come to terms with that on all sides, and including most 
149 

specifically the broadcasters. You may able to stop that from happening, but you are not going to be able to get what you think is 

the rectification of an injustice on the digital side without coming 

to terms with that. 

And with that I yield back. 

Mr. CHAFFETZ. [presiding.] I thank the gentleman. 

I now recognize the gentleman from California Mr. Issa. 

Mr. ISSA. Thank you, Mr. Chairman. 

I am going to follow up on my distinguished colleague and friend. 

And when I say that, Howard, you got kind of a standing ovation 

before you came out because of your good work on this Committee, 

and you are going to be missed until you pop up somewhere else, 

and then we are going to be glad to have you back in whatever roll 

you choose to have. So I want to personally take a few moments 

to thank you for the work you have done with me on both this 

Committee and others. 

Mr. BERMAN. If the gentleman would yield, I do not want to be 

on the copyright royalty tribunal. 

Mr. ISSA. You know, Howard, one the beauties of not being in 

elected office is that your obligation is only what you want in the 

future. 

Mr. Reese, I am going to follow up on what Mr. Berman started 

on. Do you think that if you webcast from a terrestrial-based location, you promoted the artist the way you do on a regular terrestrial radio station, your price should be the same as it is on terrestrial radio station? It is not a trick question; we all know the price 

is free. 

Mr. REESE. Well, the price over there in terms of a cash price has 

been free. In terms of the promotional value that has been provided—— 

Mr. ISSA. Well, then the question is if Pandora, sitting next to 

you, or yourself in a Web broadcast, if do the same promotion, 

should the price be the same? Because I tell you, Mr. Kennedy is 

perfectly happy, I suspect, to add an equal amount of promotion to 

Pandora on behalf of the artist if it gets him a price of free. 

Mr. REESE. Well, Mr. Kennedy recently, or just moments ago, 

volunteered for our industry to pay $4 billion in as well. So I agree 

with you, he would be happy for us—— 

Mr. ISSA. No, actually he wants your price. I have no doubt, and 

I am not going to ask him to state it, because it is just too obvious—— 

Mr. REESE. No. I—— 

Mr. ISSA. Just hear me out for a second. I have been working 

with Mr. Conyers and Mr. Berman and others for years on this trying to figure out how do we get to something that Mr. Jam and others can have their business model work, and, of course, all those 

people who want to create, and yet be fair to the competition between the two of you. And I think it is wonderful that you are seated next to each other, because one of you has not made a profit because, in fact, you are paying a tremendous amount of royalties on 

the music and trying to have a business model—as good a model 

as it is in gross revenues—have a business model that has some 

net revenues. 
150 

But they are paying the equivalent of your $4 billion, if you will. 

You are paying zero. And every time we talk about paying anything, you know, National Association of Broadcasters push back 

and say, we are all going out of business, we can’t afford it. 

So am I to presume that I have to discount Mr. Kennedy to some 

new numbers so he can break even, but even at free you are going 

to go out of business. So my question to you is isn’t harmonization, 

an amount greater than free, that allows specifically Congress to 

unwind its past participation that created multiple standards 

where like competitors pay vastly different amounts of royalties— 

and I say so because I am a cosponsor of the bill not because I 

think it is the final bill, but because there had to be a discussion 

and starting point, and it was a new approach to it. So I would love 

to hear your answer, sir. 

Mr. REESE. We are here because we think it is important that 

we discuss these issues. Several of the Members have alluded to 

the desirability of a free market business. Mr. Sensenbrenner suggested this Committee is sick and tired of dealing with this issue, 

and that we ought to address this. 

We have seen free market solutions begin to happen here, and 

we believe that is the right way to approach this, rather than having a mandate of some variety come in here. We will, for economic 

reasons, continue to do our best as an industry to maintain our viability as a business to be able to continue to serve our communities, 

to be there in times of emergency, but we don’t believe that a mandate is the way to address that. We believe that a free market approach is the way to work, and it is beginning to work. We would 

encourage this Committee to allow that process to continue to 

thrive. 

Mr. ISSA. Mr. Jam, you obviously are in a different position. You 

receive nothing in some cases, some money in others, and no particular difference in what you are delivering to those industries; 

isn’t that true? 

Mr. JAM. No, I mean, the music is the music. I get paid as an 

artist on one side, and on the terrestrial radio side I don’t. 

But Mr. Reese brought something up that is kind of interesting. 

If you allow me just 20 seconds here, I can read, because he is talking about let the private industries come to an agreement. 

This is just a piece of a letter that I alluded to earlier from Scott 

Borchetta, who is the president and CEO of Big Machine Records, 

who had come to a private deal with Clear Channel and, I believe, 

a couple of other of the terrestrial broadcasters. He states, while 

the debates on this subject are many, the absolute need for legislation cannot be emphasized enough. Only then will American artists 

properly participate in performance monies earned around the 

world. The United States of America stands inauspiciously in line 

with North Korea, Iran, Afghanistan and China—— 

Mr. ISSA. I thought Cuba was in there. 

Mr. JAM. They might be. He doesn’t mention them there, but 

they could be—in not paying artists for terrestrial sound recording 

performances. And he goes on to say, respectfully, this is despicable 

and unacceptable. 
151 

Mr. ISSA. Mr. Chairman, I want to thank you for your participation in creating this hearing and your willingness to continue with 

this issue. 

Mr. NADLER. Can’t hear you. 

Mr. ISSA. Maybe somebody finally decided I should cut my mic. 

But thank you again, Mr. Chairman. I yield back. 

Mr. GOODLATTE. [presiding.] I thank the gentleman for his comments and his questions. 

And the Chair recognizes the gentlewoman from California, Ms. 

Chu, for 5 minutes. 

Ms. CHU. Thank you, Mr. Chair. 

I would like to address questions to Mr. Eisenach on the composition of the Copyright Royalty Board. There is a change that is 

proposed by this bill, and, in fact, this bill would eliminate the requirement that one of the copyright royalty judges have significant 

knowledge of economics, and that one of the other judges be an expert in copyright law. Given that economics and copyright are certainly central to deliberations of this Board, what are your 

thoughts on this change? 

Mr. EISENACH. Well, first of all, I find the provision eliminating 

the requirement for someone with economic knowledge to be especially personally offensive and hope the Committee would take that 

under consideration. 

But, you know, the rate-setting process, the notion of establishing independent commissions to set prices in circumstances 

where either as a matter of first instance in the case of public utilities or as a matter of a backstop in the instance of the compulsory 

licenses here, the independence of those bodies and the ability of 

those bodies to operate as expert bodies and apolitical bodies is at 

the core of the whole notion of how we approach these issues. We 

seek to set politics aside and to have an expert group dispassionately look at the evidence and arrive at the best possible conclusion. 

Now, I have reviewed the major proceedings that have taken 

place under the Digital Millennium Copyright Act, and I believe 

that is what has taken place. And that is different from saying that 

they have hit the right price on the mark to the penny each time. 

That is not going to happen in this kind of rate-setting proceeding. 

But have they established a rate which reasonably approximates 

the market-based rate? I believe they have. 

And the changes that are proposed, the ones that you mention 

and others, in IRFA are changes—for example, I think requiring 

that the Copyright Royalty Board judges be confirmed, but also 

that the Board not be able to function without a full capacity really 

guarantees that each time there is a vacancy on the Board, all of 

these issues, which are contentious economic issues properly decided outside the realm of politics, but properly decided in an expert realm, all of these issues will be forced to be represented in 

a political framework. 

So that is what I think we are trying to get away from when we 

establish an entity like the Copyright Royalty Board, and the 

changes that IRFA would make, you know, would throw us back 

into the fire that we were trying to escape from in the first place. 
152 

Ms. CHU. In fact, I would like to follow up on that issue, the political appointments of the Copyright Royalty Judges. Mr. Huppe, 

I could direct this toward you, which is this curious change that 

the Senate confirm the Copyright Royalty Judges, and given the 

politics and stagnation that is mired around any nomination appointment to the Senate, is this advisable? There are many political appointees that have yet to be confirmed right now, and 

wouldn’t adding the CRB judges to this list of positions requiring 

confirmation lead to a lot of inefficiencies in the system? Both of 

you. 

Mr. EISENACH. Well—— 

Mr. HUPPE. Congresswoman, absolutely that is true. The Copyright Royalty Judges perform a very important function, and it has 

been set up in a certain way by Congress, and the system is working. To echo the words of Mr. Eisenach, the judges have developed 

a very particular expertise, and there are very complicated cases 

that they review. 

There has been the impression left, I think, by some of our witnesses that these are willy-nilly rates that are set by these judges. 

Nothing could be further from the truth. These are very complex 

hearings with many witnesses, many days of trial testimony, unbelievable amounts of discovery, complex economic theory, looking at 

markets, looking at actual deals that have happened in the marketplace. These decisions are based on real deals out in the real marketplace involving free sellers and free buyers. They are the absolute thing that the judges should look to. 

So they have developed this expertise, and politicizing the process by making them subject to Presidential appointment would be 

a problem firstly because it politicizes the process, and it is exactly 

this type of process that we do not want to politicize. And it would 

also lead the system to encounter serious problems. There is almost 

always something going on before the judges. With all the different 

classes of service both in 114 and other sections of the Copyright 

Act, there is an ongoing and very high-volume business that judges 

have to deal with. To have that interrupted with gaps and political 

disagreements over who should sit and who should not would work 

great harm to the system. 

Ms. CHU. And, Dr. Eisenach, I don’t know if he wanted to continue his thought. 

Mr. EISENACH. I just repeat what Mr. Huppe said and say that 

if you go back over the course of about 100-plus years of, both 

through State Public Utility Commissions and through independent 

regulatory commissions at the Federal level, this notion of taking, 

what are essentially direct economic fights, what is before you 

today is two constituencies, each of which wants to get paid more, 

or multiple constituencies all of whom want to get paid more. Now, 

the question is are we going to do that on the basis of who can get 

the most postcards mailed to their Members of Congress, or are we 

going to do it on the basis of some kind of objective standard, and 

what is that standard going to be? 

And I think you want an objective process to decide those things, 

first of all. And second of all, I think what you want is an objective 

standard that aims to hit at something approximating the marketbased rate, which is willing buyer/willing seller. 
153 

Ms. CHU. Thank you. I yield back. 

Mr. GOODLATTE. The gentleman from Utah Mr. Chaffetz is recognized for 5 minutes. 

Mr. CHAFFETZ. Thank you. 

Mr. Huppe, at the very beginning of your presentation, you put 

up a chart that showed the royalties paid. What percentage is Pandora paying of those dollars going in? 

Mr. HUPPE. I am not actually permitted to disclose those numbers. I will tell you this—— 

Mr. CHAFFETZ. No. I want to know what percentage. 

Mr. HUPPE. What percentage of the overall revenues? 

Mr. CHAFFETZ. Yes. Yeah. 

Mr. HUPPE. Pandora, they pay a substantial portion of our revenues. 

Mr. CHAFFETZ. I want to know a percentage. You are here testifying before Congress. Don’t tell me you don’t have permission from 

your mom. Tell me what the number is. 

Mr. HUPPE. Well, with all due respect, Mr. Chaffetz, my mom is 

not here today. 

Mr. CHAFFETZ. And I am, and I want to know what percentage—— 

Mr. HUPPE. Of the current, based on numbers that I have most 

recently seen, Pandora, of Internet revenues or overall revenues to 

SoundExchange? 

Mr. CHAFFETZ. What? 

Mr. HUPPE. Are you asking overall revenues or Internet revenues, Mr. Chaffetz? 

Mr. CHAFFETZ. Based on that chart that you put up there. You 

used a chart earlier. 

Mr. HUPPE. I used a chart that showed the growth of services. 

Mr. CHAFFETZ. Let us get both numbers. 

Mr. HUPPE. Roughly a third. Somewhere between a third and a 

half of our revenue is from Pandora. 

Mr. CHAFFETZ. Overall. What about from just the Internet portion? 

Mr. HUPPE. Just the Internet? They are in the neighborhood of 

60 to 70 percent. 

Mr. CHAFFETZ. Thank you. 

Do you feel the 801(b) standard is working when you determine 

what record labels base songwriters; is that the right standard, is 

that working? 

Mr. HUPPE. You are referring to the 115 standard, Congressman? 

Mr. CHAFFETZ. Yes. On how record labels pay songwriters, does 

the 801(b) standard work? 

Mr. HUPPE. I think the best standard that everyone should follow—and it is my understanding that the record labels, if it is part 

of a broader solution involving comprehensive reform like has been 

discussed here multiple times today, I believe the record labels are 

willing to play by the same rules as everybody else. 

Mr. CHAFFETZ. Well, we will have to further explore that. 

Mr. Jam, as you know, currently the amount SoundExchange receives for any given recording played by an Internet radio station, 

generally 50 percent goes to the copyright holder, which is usually 

the record label; 45 percent goes to the artist; and 5 percent is set 
154 

aside for background and session musicians. Do you think that the 

majority of that should go to the copyright holder, essentially the 

record label, or should the artist get more? 

Mr. JAM. Well, let me hit my button here. Sorry about that. I 

guess I feel that, first of all, 50 percent for the compulsory rate is 

fair because it—— 

Mr. CHAFFETZ. So you are not suggesting that artists should get 

the majority of the revenue. 

Mr. JAM. I don’t think I am suggesting anything yet because I 

had only started talking. I believe that the 50 percent is the correct—as the rate the court has set, that is the correct way to go. 

Mr. CHAFFETZ. I am sorry, I only have got 5 minutes. I have to 

keep going. If you like the way the rates are set, I accept that, and 

let me move on. 

Mr. Kennedy, it is obvious from the part of the argument you 

just need to pay more. You are not paying enough. I would like to 

you address that. 

Maybe I should actually start with Mr. Pakman here. Why aren’t 

more companies going into this? One of the things that is disturbing is MTV, Rolling Stone, Microsoft, Yahoo, AOL, they all 

tried to get into this business and couldn’t make it work. And the 

argument is, well, these guys need to pay more; they just need to 

pay more. Why don’t they just go out and charge? I mean, obviously there is a marketplace, according to the argument on this 

side of table. The argument is that they are just not charging 

enough. Their ad sales team isn’t good enough. How do you view 

that? 

Mr. PAKMAN. Congressman, we don’t have a market here. We 

have very few willing sellers, huge amount of concentrated power, 

and we have almost no buyers. We have only one large stand-alone 

company in Internet radio, and we have plenty of other players 

who are in digital music, but they subsidize digital music with 

profits from elsewhere in their business. In a sense they use music 

as loss leaders. 

We want an ecosystem where we have hundreds or thousands of 

participants, licensees offering music services, Internet radio and 

others. 

Mr. CHAFFETZ. I’m sorry, my yellow light is already on. I got to 

keep going. Mr. Kennedy, can you address that please. 

Mr. KENNEDY. I think the evidence is that Pandora monetizes 

Internet radio better than any other entity based on all of the public information that I’ve seen. This is not a Pandora-specific issue. 

The issue is that at 7 percent of all radio listening in the U.S., 

we’re paying a quarter of a billion dollars. That if the CRB rates 

were applied to all music radio listening in this country, the rates 

due would be over $4 billion. 

Mr. CHAFFETZ. Sorry to interrupt you right there, but based on 

what happened in your last experience, what percentage of your 

revenue would have had to be paid out in royalties? 

Mr. KENNEDY. If the CRB ruling in 2007 were let to stand, we 

would have to pay more than 100 percent of our revenue in royalties and would have run out of business. 

Mr. CHAFFETZ. Mr. Chairman, as I yield back, I believe that the 

801(b) standard, what this bill is suggesting that we would move 
155 

toward, would be the more fair opportunity for those to have this 

discussion and take into account all of the factors that are out 

there, not just cherry-picking, some selected deals in order to convince some judges out there, I really do believe it can actually get 

to that standard. 

So this is the beginning of this, Mr. Chairman. I appreciate the 

discussion here, but I hope that this will continue to bear fruit because Internet radio should be thriving far and above and beyond 

just Pandora. 

Mr. HUPPE. Mr. Chairman, may I respond to that? 

Mr. GOODLATTE. Yes. The gentleman’s time is expired but we’ll 

allow you to respond. 

Mr. HUPPE. Thank you, Mr. Chairman. There’s been much said 

about Pandora and the percentage of revenue that they pay. And 

what I think it’s important for everyone to understand is that percentage of revenue can be a very misleading quote. The only person 

that has control over Mr. Kennedy’s revenue in this room is Mr. 

Kennedy. Pandora has focused over the past several years and 

they’ve made a conscious business decision, and we don’t fault 

them for it, but it’s a business decision that was made to focus on 

growing their user base, growing their audience, growing their 

brand, growing the hype. They’ve done a very good job of it and we 

congratulate them. 

They had an IPO last year. But the fact that they have done 

things other than focus on revenue is a very important part of this 

discussion. A few years ago, they would charge heavy users who 

went—— 

Mr. CHAFFETZ. Can you point to anybody else that is successful? 

Point to one. Just name one. 

Mr. HUPPE. It depends what you mean by success, Mr. Chaffetz. 

Mr. CHAFFETZ. Revenue, money, dollars, stock. 

Mr. HUPPE. There are many companies who do not—— 

Mr. CHAFFETZ. Name one. 

Mr. HUPPE. There are many companies who do not start off in 

a revenue positive situation. 

Mr. CHAFFETZ. I know, because there’s none. Name one. 

Mr. HUPPE. We are—— 

Mr. CHAFFETZ. It’s been out there for awhile. The Internet is 

thriving. I think it’s going to be around for awhile. Name one that 

is successful under this model. 

Mr. HUPPE. If you look to success as a measure of investment, 

$1.5 billion market cap of Pandora, commercial—— 

Mr. CHAFFETZ. Outside of Pandora, name one other company 

that’s successful. 

Mr. NADLER. Mr. Chairman. 

Mr. GOODLATTE. The time of the gentleman has expired. For 

what purpose does the gentleman from New York take recognition? 

Mr. NADLER. I just ask that Mr. Huppe was answering a question and then Mr. Chaffetz came in with some other question. I 

would like to hear the end of the answer he was giving. It was very 

fascinating as far as he got. 

Mr. GOODLATTE. We’re going to let him very briefly answer that, 

and then we are going to move on to the gentleman from Florida 

who has been waiting patiently to ask his questions. 
156 

Mr. HUPPE. Thank you, Mr. Chairman. As an example of Pandora’s focus on users over revenue, a few years ago for heavy users 

who went over 40 hours a month they would charge $0.99 if a 

heavy user went over 40 hours a month. There came a point where 

they stopped doing that. 

Mr. CHAFFETZ. Mr. Chairman, he’s not answering the question. 

Mr. GOODLATTE. I know, but we all exceeded the amount of time, 

so we’re going to discontinue and we’ll allow the gentleman from 

Florida to follow up on that if he wishes to. But the Chair recognizes Mr. Deutch for 5 minutes. 

Mr. DEUTCH. Thank you, Mr. Chairman. I choose not to follow 

up on that. Here’s what I would like to do. Mr. Kennedy, you and 

I have spoken before about your service. I’ve suggested to you that 

there may be no one in Congress who spends as much time enjoying your service as I do. I’m a huge fan. What I’ve learned in preparation of this hearing that was the most troubling to me though, 

quite frankly, is that for all of the discussion about percentage of 

revenue, the number, and I would like to give you the chance to 

talk about this, but the number that there seems to be general 

agreement on, that listeners like me wind up contributing to the 

artists is $4 per listener, $4 per listener goes to the artist. And that 

according to some of the estimates that we’ve seen, the recording 

industry has some and there are some others out there, that number under this legislation would be reduced to less than $0.70. 

So I guess I’m troubled by that. And I would actually get back 

to Mr. Chaffetz’s line of questions here, and the exchange that was 

taking place. I understand that there’s this discussion about revenue, but the fact is that there is some control that you have over 

revenue. And why is it that instead of—why is it that this entire 

discussion is about a percentage of your current revenue compared 

to others’ percentage of current revenue instead of a discussion of 

how you monetize, and the fact that the results of the way you 

monetize while successful generate $4 per listener for all the time 

I listen to be reduced under this bill to less than $0.70. 

Mr. KENNEDY. Mr. Deutch, part of what has, I think, complicated 

this debate is to talk about the royalties paid by fractional pieces; 

how much per song, how much per user. The fact of the matter is 

that we’ll pay SoundExchange this year almost a quarter of a billion dollars. 

Mr. DEUTCH. We don’t dispute that you’re paying a lot of money. 

I’m just looking at how that actually translates to what artists are 

paid. And as a per listener, on a per listener basis. 

Mr. KENNEDY. And I think for perspective we pay that quarter 

billion dollars for approximately 7 percent of radio usage in this 

country. A study by a well-respected music business professor at 

Washington Lee University said what if we took the CRB rates and 

applied them to every song played on the radio across the U.S. The 

results in payments due under the CRB willing buyer/willing seller 

are estimated by this professor to be over $4 billion. And for perspective it’s important to know the entire revenue of the recording 

industry in this country is that same zone. 

Mr. DEUTCH. I understand that. I’m just asking whether there 

are other ways to monetize what you do. Well, let me just turn to 

Mr. Reese who has figured this out with the benefit of not having 
157 

to pay the performers at all. But Mr. Reese, you said that—you 

spoke earlier in your testimony about the fact that there would be 

a—I want to make sure that I get this right. I mean, you talked 

about broadcast radio being always free and available all the time, 

and you worried about—you warned against this performance tax 

that may be coming. And I just wanted to clear one thing up there. 

On your stations that are talk radio stations, you pay the hosts, 

right? And on the stations that are talk radio stations that don’t 

have local hosts but have syndicated hosts who aren’t in the studio 

but your producers there are producing the show, they still, those 

hosts still get paid as well. 

So I guess what I’m trying to figure out is, as Mr. Kennedy and 

Pandora grapples with how to make it work on that side, here— 

why is it that you would characterize as a performance tax a payment that you make regularly in very large amounts of money to 

talk show hosts all throughout the country? 

Mr. REESE. We are more than a music service. We are not Pandora, we are not any other webcaster with AM/FM radio. We are 

local, we are produced. We’re more than just someone who pushes 

a button randomly and music comes out. Music comes out, with all 

due respect to the brilliant algorithms that Mr. Kennedy’s people 

have developed. There’s a lot more involved in this. There has been 

a lot of support here for a negotiated resolution of this problem. We 

need a solution where everybody thrives. On the webcast side only, 

which is what this legislation addresses, there’s a system in which 

one side doesn’t have a way to make a profit. We haven’t demonstrated it yet, and a number of people have tried. We haven’t 

been able to sustain a profitable business on the webcasting piece. 

And this piece of it needs a different solution. Ideally, a negotiated 

solution. 

Mr. DEUTCH. I understand. I hope this is the start, as Mr. Conyers said, I hope this is the start of our discussion. But the one 

question I’m just trying to figure out is, and Mr. Chairman, this 

will be my last question, if you could just explain to me, and I’m 

not trying to be flip, I want to understand, the difference between 

your station that pays an awful lot of money for Rush Limbaugh’s 

broadcast to Rush Limbaugh, and the station that plays Rihanna 

many, many times an hour, but doesn’t pay her anything, can you 

just explain that to me? 

Mr. REESE. We are paying the disk jockey who is introducing 

Rihanna and is helping her label sell lots and lots of music over 

the year. So again, it’s not just the musician who’s involved here. 

I understand your question. It is an issue that has been addressed 

and continues to be addressed. It’s a very complicated issue. It 

lends itself best to private negotiation. And we’re beginning to see 

that. We believe that’s a better solution than a mandated solution 

on a one-size-fits-all basis. 

Mr. GOODLATTE. Thank you, Mr. Reese. The time of the gentleman has expired. And the Chair recognizes the gentleman from 

New York for 5 minutes, Mr. Nadler. 

Mr. NADLER. Thank you, Mr. Chairman. Let me say first of all, 

just following up on the gentleman from Florida, I don’t think it’s 

a complicated question, I think it’s a very simple question. People 

ought to be paid for their service. As far as I can tell performing 
158 

artists and over-the-air-radio are the only people in the United 

States or the world for that—well, slave labor in some other parts 

of the world, but only people in the United States who are not paid 

for their labor, period. And to me, that’s very simple. I believe basically in the free market, though some people may not think I do, 

but I do. I also believe in government intervention when strictly 

necessary, but when strictly necessary. And that brings the question of when it’s strictly necessary. I don’t understand why—I do 

think that the bill we’re talking about here should not be enacted 

except perhaps as part of a larger global solution to the problems 

we’re talking about because any of the specifics just increase the 

distortion of something that we keep distorting all the time. 

With that in the background, let me ask a couple of specific questions. Mr. Kennedy, two questions. First of all, you’ve referenced 

several times a well-respected professor. Can you tell us who that 

is? 

Mr. KENNEDY. Forgive me for not pronouncing his last prior. His 

name is David Touves, T-O-U-V-E-S. 

Mr. NADLER. And where is he? 

Mr. KENNEDY. A longstanding business professor at Washington 

and Lee University. 

Mr. NADLER. Washington and Lee. Thank you. Secondly, as Mr. 

Huppe points out in his testimony, the founder of Pandora, who I 

think is your predecessor, said only 3 years ago in July of 2009 

after the private negotiations on rates concluded that ‘‘Pandora is 

finally on safe ground with a long-term agreement for survivability 

royalty rate—for survivable royalty rates. This ensures that Pandora will continue streaming music for many years to come.’’ Now 

you’re saying the rates are too high. Are we going to have to 

change the law every time the CRB decides a rate under the law 

that is not to your liking or to the Internet community radio’s liking? Three years ago you said this would be fine for a long time, 

and now you’re back and saying we got to change the law. 

Mr. KENNEDY. Yes. And I would encourage you to read that entire—— 

Mr. NADLER. Yes what? Yes, we have to change the law every 

time you don’t like the ruling from the CRB? 

Mr. KENNEDY. We truly want to get Congress out of this business. And I think all of us who run businesses would like to spend 

our time running businesses. But there’s unfinished business here. 

And I would encourage you to read that full blog post by Tim 

Westergren following the settlement in 2009. 

Mr. NADLER. But my real question is, without going into another 

long discussion here, 3 years ago, the head of Pandora said after 

the rate setting, we’re finally on clear ground, it’s going to take us 

for a long time, this ensures Pandora will continue streaming 

music for many years to come. The implication was Congress can 

relax, forget about it, it solved the problem for a long time. Now 

it’s 3 years. 

Mr. KENNEDY. In the very same posting, first of all, that agreement expires in 2015. We are fully prepared and are living with 

that—— 
159 

Mr. NADLER. So in other words when you—excuse me. So when 

your predecessor 3 years ago said Pandora continues streaming 

music for many years to come, he was talking about for 6 years? 

Mr. KENNEDY. Yes. 

Mr. NADLER. Okay. 

Mr. KENNEDY. In one sense he was talking about the prospect of 

going out of business. It’s also very important, in a subsequent 

paragraph, Tim said, the system remains fundamentally unfair. 

Mr. NADLER. Okay. Fair enough. Secondly, let me ask Mr. Huppe. At $4 a year to a recording artist, which seems a ridiculous 

figure, but if it’s only $4 a year why are royalty payments 50 percent of their revenues? 

Mr. HUPPE. And yes, actually, Congressman, it’s $4 to everybody. 

Only half of that goes to the artist side. The other half goes to 

copyright owners. Two dollars goes to the artist side. 

Mr. NADLER. So even more so, why is it—— 

Mr. HUPPE. And the reason that it is such a big percentage of 

the revenue is, as I mentioned, Pandora has made a very conscious 

business decision. They could do lots of things to monetize more 

than they do. 

Mr. NADLER. Okay. So the answer is they should be looking more 

at the revenue side? 

Mr. HUPPE. The revenue side would definitely change that ratio, 

yes. 

Mr. NADLER. Thank you. I don’t want to rush, but I have more 

questions. Finally to Mr. Eisenach. 

Professor Eisenach, the Internet community says it would like 

Congress to change the rate standard it faces from willing buyer/ 

willing seller to the factors found in section 801(b). In fact, the 

Chaffetz bill would use the factors in 801(b) but then they add additional factors to the current 801(b) law. First of all, what is our 

evidence of the kind of rate the CRB has set in the past using the 

801(b) standard? 

Mr. EISENACH. Well, in SDARS I proceeding, for example, the 

Copyright Royalty Board established that its best estimates of the 

appropriate rate, and they were setting it on the basis of percentage of revenues, was 13 percent. And then they came back, they 

considered the 801(b), the fourth standard in particular, the disruption standard, and decided that, in fact, the correct standard was 

7 percent, so they cut it about in half. 

Mr. NADLER. I have two quick questions. Well, I’ll make it one 

last one. If the CRB interprets 801(b) as compelling a below market 

rate, what will likely happen to the royalties received by artists 

under H.R. 6480 which uses a version of this standard? 

Mr. EISENACH. As referred today, half of the royalties paid under 

the compulsory license go to the artist, so I think that’s a good estimate. They would lose half of what their—half of whatever the impact was. 

Now, on the question of what would that be, if you just—a lot 

of things happen when you change prices. Let me just say it’s very 

important, you’re hearing two numbers here. You’re hearing cost as 

a percentage of revenues. That’s not a number that economists look 

at when they think about how competitive is a market or what are 

people paying, right? The only thing you’ve heard today that ap-
160 

proximates a price is $4 per year. That’s a price. The price per play 

which that is based on, that’s a price. Now, when you start changing prices, which is what would happen, you would end up with a 

lower price, a lot of things can move around. But if you simply take 

the status quo, other things equal, and do the math, rates would 

go down by—revenues would go down by 85 percent. 

Mr. KENNEDY. Can I answer just briefly? 

Mr. GOODLATTE. Actually, we are running very low on time and 

neither the Ranking Member or the Chairman have asked any 

questions yet, so the gentleman’s time has expired. 

Mr. NADLER. Thank you. I yield back. 

Mr. GOODLATTE. And the Chair recognizes the gentleman from 

North Carolina, Mr. Watt, for his questions. 

Mr. WATT. Thank you, Mr. Chairman. And it’s been an interesting hearing, a lot of different concepts discussed. The one I’m 

kind of fascinated with is the one that Mr. Reese seems to support, 

which is this free market solution. And I want to kind of go at that, 

what that really means. Under free market solution, I take it we 

would do away with a compulsory license, and you would have to 

go and negotiate with every artist for the playing of their music. 

And if you played their music, you would be subjected to litigation 

for playing it. 

And so I’m trying to figure out what this free market system is 

that you are talking about. If you wanted to play Mr. Jam’s music, 

you had no compulsory license, you got to go find Mr. Jam because 

you’d like his music to play on your station like you go and find 

your talk artist. Maybe you like Beyonce ́ for awhile so you will contract with her for a whole year. You got to pay her. If you like her 

and you don’t go and track her down and negotiate with her whatever the rates are, she sues you when you play her music and 

you’re in litigation forever. 

That’s the free market we’re talking about? Or that is assuming 

we just passed a law that recognizes a performance right. We don’t 

do anything else. We don’t do anything other than say performers 

have a right to be paid for their music just like everybody else has 

the right to be paid for whatever they produce. Is that the free 

market that you’re talking about, Mr. Reese? 

Mr. REESE. Well, there are a lot of nuances to your question. 

Mr. WATT. A lot of nuances to my question, but that’s the free 

market, I take it. Let me just ask the bottom line question. Would 

you accept that free market concept in that way? Would that be a 

successful deal for all of the stations? 

Mr. REESE. What seems to be beginning to work, Mr. Watt, is in 

the current context of a compulsory license record labels and—— 

Mr. WATT. So you’ve done away with the free market because 

you’ve created a compulsory license? 

Mr. REESE. You’ve also created a right that doesn’t exist as well. 

Mr. WATT. Okay. We don’t do anything. We don’t even recognize 

a performer’s right. So when you use somebody’s music, you get 

sued. Is that a world that you think would be successful for the 

broadcast industry? 

Mr. REESE. What seems to be working, beginning to work here 

is in the context, in the current world in which we exist, record la-
161 

bels and broadcasters seem to be beginning to find a solution here 

that works for both sides. 

Mr. WATT. I understand that, I do recognize that. 

Mr. REESE. We are not supportive of a creation of a new right, 

we’re also not supportive of undoing much of what we’ve got so far. 

Mr. WATT. That was really the question I was asking. Mr. 

Pakman, you’ve been, since you’ve testified, left out of most of the 

questions and answers. How would you go about monetizing the 

rights that Mr. Kennedy has, other than paying for them through 

the musicians taking a hit? 

Mr. PAKMAN. I think Pandora is doing a fine job of exploiting the 

two business models available to it. 

Mr. WATT. My question is are there some revenue sources that 

Pandora could access to monetize their business to make it more 

viable? That’s the question I’m asking. If everything else was great 

are there some other revenue sources they could access? 

Mr. PAKMAN. I believe the only two available to it are to ask its 

users to pay and to ask brands to pay, and that they ask both of 

them to pay. So I believe they’re pursuing the two business models 

available to them. 

Mr. WATT. Mr. Eisenach, you seem to disagree with that. 

Mr. EISENACH. And very briefly, two points. First of all, there’s 

a lot of entry going on in this marketplace. Pandora just raised 

50—excuse me, Spotify just raised $50 million for Goldman Sachs 

who are no dummies and would not be doing that if they didn’t 

think there were profits to be made. And veterans of Skype have 

just entered this market. Apple is considering entering this market. 

They all think they’re going to make money. 

Mr. WATT. I understand that. I’m trying to find out how you 

monetize this other than on the backs of musicians. 

Mr. EISENACH. Pandora is the fifth largest wireless on-line ad 

network in the world behind companies like Google and Facebook, 

just behind them, and fast and growing, faster than any of them. 

That’s another source of revenue, which is all of the information 

that they are accumulating about their listeners and the ability to 

sell advertising not only—to sell that information to other users. 

Mr. WATT. Okay. All right. Well, I’m out of time. I’m just theorizing here. I mean, this is something I proposed the last time we 

had this discussion about performance rights. Let’s just do a performance right. If you don’t like the rate, let the market take care 

of it. I believe in the free market. Lawyers believe in litigation. I 

mean, you know. There’s some benefits that we’re providing here 

to all parties, and it just seems to me that everybody needs to get 

a grip here and sit down and try to work this out rather than trying to nibble around the edges of it. I don’t think we can solve this 

problem by dealing with 7 to 10 percent of the industry. We got to 

be dealing with the entire package here, otherwise I personally 

don’t have much interest in it. 

Mr. KENNEDY. Mr. Chairman, may I have a minute to respond? 

Mr. GOODLATTE. Actually, we are very low on time, so I’m going 

to recognize the gentleman from Georgia, Mr. Johnson, for 5 minutes. 

Mr. JOHNSON. Thank you. Mr. Eisenach, in your written testimony, you argue that market-based rates result in an efficient sys-
162 

tem that maximizes consumer welfare, and yet there is testimony 

that the market is anticompetitive due to a small number of competitors that have disproportionate influence over music licensing. 

If you would give us a short explanation of that and also, or an example of that, and also tell us whether or not the marketplace is 

freely functioning or is it too complex, calculated or closely controlled? 

Mr. EISENACH. Well, first of all, I would note that the Federal 

Trade Commission just as recently as September approved a major 

merger between two of the largest, two of the four largest record 

labels, and did so saying that there was no market power issues 

to be concerned about in approving that merger. So the current 

Federal Trade Commission, I think, if they thought there were 

market power issues on that side they would have said so. On the 

other side of the market, Pandora brags, or states, ‘‘brags’’ isn’t 

fair, we should be proud of the fact that it has 69 percent of the 

market for online radio. So who is the dominant firm if we’re going 

to simply look at market shares? It is not obvious which is which. 

Now in all markets like this, you have firms with large market 

shares. That’s how they work, and the way they’re likely to work 

in the future. The battles between these firms over sharing the 

value that’s created among them are always heated battles, and 

that’s what you’re seeing here. The question is should that battle 

take place in a hearing room or should they take place in a negotiation room someplace probably in Silicon Valley. 

Mr. JOHNSON. Let me ask this question of you, sir, since we are 

on the subject of competitiveness. The bill contains certain activities by copyright owners. It targets those activities as per se violations, but would permit webcasters to engage in the same types of 

communications. Can you elaborate on that for us? 

Mr. EISENACH. Just very briefly. When you establish a system 

like the one we have of compulsory licenses, you have bargaining 

agents by the nature of the institutional arrangements involved. 

And so the paper that I submitted I go through a long list of things 

that are in IRFA, the proposed legislation, which attempt to tilt the 

playing field. And it’s, I think, a very kind of bold face attempt to 

simply gain the upper hand. 

Mr. JOHNSON. Let me ask Mr. Huppe also on that issue. 

Mr. HUPPE. Thank you, Congressman. It’s important to be able— 

what SoundExchange does, for instance. When we administer this 

license, this is the job we’ve been selected to do. And part of what 

we have to do when we administer that license is educate our side 

of the table and let people know what’s going on with the statute. 

It’s very important to remember that when the CRB sets a rate it 

is binding on all record companies. It forces them to surrender 

their property at the rate the CRB sets. And I would note there’s 

no such similar obligation on the other side. It doesn’t bind the 

webcasters to do anything. It binds the record companies. 

So it’s not only the right thing to do. We believe it’s our duty to 

work with them, talk to them, educate them about what’s going on 

and when we go to the CRB, represent them on their behalf. And 

some of the language in the bill, which is one-sided directed our 

way, is troubling in its restrictions. 
163 

Mr. JOHNSON. Thank you. Let me ask Mr. Reese. Mr. Reese, in 

1998, we responded to the rise of satellite and digital technologies 

by amending the Copyright Act to create a performance right, but 

exempted terrestrial broadcasters from paying royalties for this 

right. The rationale for this exemption was that broadcasters and 

sound recording owners enjoy a mutually beneficial relationship 

where broadcasters promotion and increased exposure of music 

benefit sound recording owners through increased sales, tours and 

other sources of income. Has that relationship between the broadcasters and the sound recording owners changed? 

Mr. REESE. I don’t believe that mutually beneficial relationship 

that was talked about in 1998 has changed. And that is indicated 

by the efforts the recording industry goes to with the radio industry to continue to encourage us to play their music, even though 

they’re not getting paid for that performance directly. 

Mr. JOHNSON. Do you believe that it’s fair to both artists and 

owners of sound recordings, and it’s fair to all providers of music 

or publishers of those sound recordings, do you think it’s fair for 

there to be some discrimination between any of those platforms or 

artists? 

So in other words, what I’m saying is I believe that we should 

treat artists fairly across the spectrum regardless of what medium 

or what platform we’re on, and we should also treat all particular 

phases of a platform equally as well. Do you believe that that is 

true? 

Mr. GOODLATTE. I hate to interrupt the gentleman from Georgia 

to say that’s a great question. The answer is going to have to be 

in writing. And because the time has expired all of my questions 

will be submitted to the members of the panel in writing as well. 

Both the Republican Conference and Democratic Conference have 

business that started at 2 p.m. And I regret that we have to cut 

the hearing short, but I thank you all for your contribution. This 

has been a very good start to discussing a very important issue. 

Without objection, all Members will have 5 legislative days to 

submit to the Chair additional written questions for the witnesses 

which we will forward and ask the witnesses to respond as promptly as they can, so their answers may be made a part of the record. 

Without objection, all Members will have 5 legislative days to submit any additional materials for inclusion in the record. And with 

that I want to again thank our witnesses for their contribution 

today, and the hearing is adjourned. 

[Whereupon, at 2:09 p.m., the Subcommittee was adjourned.] 

(165) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Ranking Member, Committee on 

the Judiciary, and Member, Subcommittee on Intellectual Property, Competition, and the Internet 

Today we examine various music licensing issues and will explore ways to improve the current music licensing system. 

It is my understanding that this process will continue into the next Congress, 

which I strongly support. 

The Internet has dramatically changed the way music is produced, marketed, and 

distributed. In particular, Internet radio has become a major source of music for 

many listeners. 

In addition, technological developments have changed the ways by which artists 

are discovered. In past years, new artists and their songs were typically introduced 

via the radio. 

Today, artists are discovered through a vast array of platforms, including blogs, 

YouTube videos, webcasts, satellite radio broadcasts, and even the artists’ own 

websites. 

In today’s world, music is accessible to the public in whatever format is desired, 

at any time, and on demand. 

As we discuss the various issues presented by these technological developments, 

it is essential that we also consider the potential impact that our decisions will have 

on songwriters and whether their entitlement to proper compensation is adversely 

affected by these decisions. 

Among the issues we should address during today’s hearing and the hearings we 

anticipate holding in the next Congress are the following. 

To begin with, I am concerned that H.R. 6480, the ‘‘Internet Radio Fairness 

Act,’’ may not actually improve the current system and that it could result in artists 

receiving less compensation. 

The bill seeks to facilitate a process by which all digital music services would be 

judged by the same rate-setting standard. 

The bill does this by changing the existing ‘‘willing buyer, willing seller’’ standard 

that Internet webcasters currently use to the 801(b) standard used for determining 

rates for satellite and cable television music channels. 

As a result, H.R. 6480 would lower the royalty rate for Internet webcasters as 

well as lower the royalties that Internet webcasters would pay to artists by more 

than 85 percent. 

Let me point out one obvious fact: musicians and singers across all musical genres 

depend on these royalties, which are often their only compensation for their work. 

Not surprisingly, this explains why more than 125 artists have signed on to a letter expressing strong opposition to H.R. 6480. 

It also explains why the bill is opposed by the AFL–CIO, NAACP, musicFirst Coalition, SAG-AFTRA and the American Association of Independent Music. 

It is clear that we cannot ignore these serious concerns. 
166 

Another issue that must be examined is whether our efforts to improve the 

music licensing scheme will be, in fact, truly fair if it does not include performance 

rights for sound recordings. 

As everyone here knows I am a strong supporter of artists and believe that the 

current compensation system on terrestrial radio—by which I mean AM and FM 

radio—is not fair to artists, musicians or the recording labels. 

When we hear a song on the radio, the individual singing the lyrics receives absolutely no compensation. 

To address this inequity, I introduced the ‘‘Performance Rights Act of 2009,’’ that 

would have created both an AM/FM performance right and set a new standard for 

digital services. 

Every other platform for broadcast music—including satellite radio, cable radio, 

and Internet webcasters—pay a performance royalty. Terrestrial radio is the only 

platform that does not pay this royalty. 

This exemption from paying a performance royalty to artists no longer makes any 

sense and unfairly deprives artists of the compensation they deserve for their work. 

And, finally, the process for setting rates for music royalties should be inherently 

fair. 

Some, however, claim that the current rates are too high. 

The compulsory license for digital music radio services dates back to 1995 with 

the passage of the Digital Performance Right in Sound Recordings Act. 

This Act allowed digital musical broadcasters—like cable and satellite services— 

to transmit sound recordings without asking permission or negotiating rates with 

rights holders. Instead, the rates would be set by statute. 

In 1998, Congress granted Internet radio services permission to take advantage 

of this compulsory license, but established that a market-oriented ‘‘willing buyer, 

willing seller’’ would be put in place moving forward. 

Some, however, allege that this standard is not fair. 

Thus, our goal should be to examine the bona fides of these claims to ensure that 

our royalty system is, in fact, fair and competitive. 

I look forward to working together with my colleagues to ensure that the music 

licensing process is fair and does not have unintended consequences that will harm 

artists. 
167 

ATTACHMENT 

November 27, 2012 

The Honorable Bob Goodlatte 

Chairman 

House Committee on the Judiciary 

Subcommittee on Intellectual Property, 

Competition, and the Internet 

u.S. House of Representatives 

Washington, D.C. 20515 

Dear Representative, 

The Honorable Ben Quayle 

Vice Chairman 

House Committee on the Judiciary 

Subcommittee on Intellectual Property, 

Competition, and the Internet 

u.S. House of Representatives 

Washington, D.C. 20515 

The best economic outcomes result from private negotiations in the marketplace, free from 

government distortions and certainly free from government price controls. This is among the 

most fundamental principles offree markets. That's why believers in free markets seek to 

reduce, rather than increase, the government's role in markets and price-setting whenever 

possible. 

Accordingly, on behalf of the undersigned organizations, we respectfully write to express our 

grave concerns about H.R. 6480, the misnamed "Internet Radio Fairness Act of 2012." This 

potentially disastrous bill would overturn existing voluntary "willing buyer/willing seller" 

agreements between webcasters such as Pandora and the music industry to establish royalty 

rates through 2015. Those agreements have provided the foundation for the successful 

Internet radio marketplace, which has witnessed exponential growth in services and audiences. 

In the past five years alone, the number of Internet radio services has blossomed from 855 to 

nearly 2,000, and their annual revenues have exploded as well. 

In economic terms, H.R. 6480 would provide a government subsidy to a private interest in the 

form of a below-market royalty price distortion created by government. And it would be doing 

so largely for the benefit of Pandora, a company that raised $235 million in an IPO and is 

currently valued around $1.72 billion. 

We congratulate Pandora and their competitors for their market success. This is not, however, 

by any means an industry in need of a "bailout." 

Today, we are witnessing a proliferation of new business models for the distribution of digital 

content. Various players are attempting many varieties of business models in order to 

determine what works for consumers. This is an exciting demonstration of the vitality of freemarkets at work, and it's too soon to even guess what the outcomes will be. 
168 

Page 2 

Some business models incorporate greater degrees of reliance upon advertising, while others 

rely more heavily upon subscription fees and other sources of revenue. No two business models 

are alike, and we don't want them to be-we want wide experimentation with differing 

business models, so consumers and the marketplace will be the beneficiaries. 

Because these differing business models vary to such a wide degree, it is inappropriate to 

compare royalty rates freely negotiated by differing business models to argue for inequity. 

Indeed, the differing details of the various business models is a strong argument for private 

negotiation and against government price and rate setting. 

Yet Pandora is doing exactly that-using an over simplistic comparison between widely 

divergent business models to argue that they are paying too much, and they are demanding 

legislative relief in the form of H.R. 6480 from their freely negotiated royalty arrangements. 

Pandora is free to choose which business model it pursues, and to adapt and modify its 

business model as the market dictates. But it should not be able to turn to Congress to 

intervene and reduce its cost structure in order to enhance or salvage a struggling business 

model. 

Further, a bill designed to benefit a single company would seem to be not only an example of 

corporate welfare, but also a form of crony capitalism. 

Proponents of H.R. 6480 claim that three cable and satellite radio companies that existed in 

1995 were unfairly granted a "grandfather clause" below-market rate by Congressional 

legislation. While we do not necessarily agree with that assertion, a fair resolution would be to 

address the mandatory below-market rate granted to those entities in 1995, rather than create 

new price controls for the thousands of companies created in an open market since that date. 

H.R. 6480 would represent an unwarranted governmental intrusion into a fledgling and thriving 

digital radio market, weakening of property rights, imposition of price controls, abrogation of 

existing and freely-negotiated contracts between independent parties, and rent-seeking by 

companies that are growing and thriving without the help of government distortion. 

There are, of course, other offenses caused by H.R. 6480, not the least of which is fewer 

royalties being paid to the original musicians and creators of the raw material upon which 

Pandora is building its business. 

And a comprehensive solution to this problem would have to address the most glaring inequity 
169 

f 

Page 3 

in the copyright royalty universe, the fact that terrestrial radio pays zero royalties to the artists 

whose music it plays. 

Thank you very much for your attention to this important issue. 

Sincerely, 

Timothy Lee 

Center for Individual Freedom 

Eli Gold 

The Harbour League 

Mario Lopez 

Hispanic Leadership Fund 

Andrew Langer 

Institute for Liberty 

Tim Giovanetti 

Institute for Policy Innovation 

Judson Phillips 

Tea Party Nation 

cc: House Judiciary Committee Subcommittee on Intellectual Property, Competition, and 

the Internet 
170 

Prepared Statement of the Honorable Jared Polis, a Representative in 

Congress from the State of Colorado 

I am pleased that the House Judiciary Subcommittee on Intellectual Property, 

Competition and the Internet is holding a hearing today on music licensing, and 

specifically discussing the Internet Radio Fairness Act, a bill sponsored by Representative Chaffetz and myself. I am thankful to Subcommittee Chairman Goodlatte and Ranking Member Watt for holding this hearing on this very important and 

timely issue. 

The Internet Radio Fairness Act (IRFA) is a common-sense proposal to address 

the discriminatory and unfair royalty rates currently imposed on Internet radio. The 

premise of the bill is simple: put Internet radio under the same standard which is 

used to establish rates for their competitors in the satellite and cable radio industries. 

In 1998, the Digital Millennium Copyright Act established the ‘‘willing buyer-willing seller standard now used by the Copyright Royalty Board (CRB) to set performance royalties for Internet radio. As time has shown, the ‘‘willing buyer-willing seller’’ approach is unworkable and has required Congressional intervention every time 

it has been applied. It assumes there is a competitive market for sound recording 

performance royalties when a true market has never existed. Under this broken royalty system, Internet radio providers pay exorbitant royalty rates: approximately 

half of their total revenues go to royalties. Without Congressional intervention, 

internet radio companies would be paying more than 100% of revenue and most 

would have shuttered their doors. In comparison, satellite radio will pay 7.5%, and 

cable radio will pay 15% in revenues in 2012. 

Before coming to Congress, I launched several online companies, so I know the 

Internet’s power to launch new businesses and to create jobs. The existing standard 

has not only harmed the ability of Internet radio providers’ ability to grow and compete, it has prevented new entrants from entering the marketplace. Several large 

companies have attempted to enter the marketplace, but have failed because they 

can’t make a profit under the current royalty system. 

Under this legislation, Internet radio would be judged under the more equitable 

801(b) rate-setting standard, which sets forth four balanced objectives to maximize 

the availability of creative works to the public, provide copyright owners a fair return, and support the development of innovative technologies that offer copyrighted 

works to the public. This standard has been used for 30 years to determine copyright license fees, and is the same standard that satellite and cable radio currently 

enjoy. Applying this same standard would promote innovation, increase consumer 

choice, and generate economic growth. 

The rate structure problems Internet radio faces are compounded by the fact that 

the laws governing the CRB provide few procedural protections for the parties. Current CRB proceeding rules do not allow copyright users to present all relevant evidence, such as marketplace agreements, which harms the judges’ ability to accurately determine the royalty rates. Moreover, the existing process to select CRB 

judges prevents adequate Congressional oversight, and has resulted in discriminatory rate decisions. 

This bill attempts to address these problems by interjecting due process and fairness into the royalty rate structure. It adds procedural protections consistent with 

the Federal Rules of Civil Procedure and Federal Rules of Evidence, as appropriate, 

to further information-sharing between the parties, promote voluntary settlements, 

reduce discovery and litigation costs, and subject the CRB decisions to judicial review. It also calls for the appointment of judges by the president, with the advice 

and consent of the Senate, instead of by the Library of Congress. 

Unfortunately, we have seen a pattern of misinformation from the other side 

about the underlying bill. For example, claims that the bill will cut rates by 85% 

are misleading. The bill does not set an actual rate, it sets a standard. The rate 

set by CRB if this bill passes is unknown, but the intent is to allow the CRB to 

set a sustainable rate to allow Internet radio to grow and flourish. Simply put, 

claims about an actual number at this point are purely hyperbole. 

Also contrary to opponents’ claims, the premise of the IRFA is not about paying 

artists less, it’s about allowing Internet radio providers to thrive—resulting in more 
171 

exposure and more revenue for singers, songwriters, and record labels of all kinds. 

Further, allowing the industry to expand will spur further innovation and improve 

artists’ ability to build a base of support and find new audiences. 

As a co-sponsor of the Performance Rights Act, I share the concerns raised by 

many witnesses at this hearing that we need to address the broadcast radio problem. However, it is my belief that the Internet radio royalty structure is an entirely 

separate and distinct issue and the time for consideration of Internet radio rates 

is now. The CRB is set to begin the next rate-setting proceeding in 2015. Internet 

radio’s potential must be unleashed now—not sometime in the future. 

It is time for America’s outdated laws to catch up with today’s technology so we 

can foster even greater innovation and job creation—generating more opportunities 

for artists and radio competition—for the benefit of us all. 

f 
172 

Response to Questions for the Record from Joseph J. Kennedy, 

Chairman and Chief Executive Officer, Pandora Media, Inc. 

PANDORA 

1. Over the long f71, da ~ lHtik"" />J.legj.'a lo~ ""DIIH1 ,...ull In higher or /oWf'r nel royalr~ ~nr. 

10 per/ormef1 and why~ 

: ()y rl~ "'0', term. we helieve lh;!llhis leg'stalion w;li relult in hialler nel roVil'ly 

payment> 10 performe", It ..... 111 en.ble new wewsti", ",..vice, to enter the market and allow current 

,ervKe.; 10 I~""n and ">paM by addir>« more pred>cl3bilUV and tran'parency inIDt/,,, nl1e_It"'1I 

proce,s, It will pla<e webt,ule" unde. tile Urn" r.te seUln8 t~ndil ,d . 801Ib). enioyed by s.1ledile.o<I 

<.able radio P'OIIiQers. tne",by ellml natins Ihe •• bi(r"y d/stlnaion \h., currentlv ~is!, IJ.elwef'n 

InterneH:lelivered tnJlSmllSloJlS an-d ttlose dellvered through means other than the Intemt!!. It will 

.1,,, import 'tanda,d ~ede",' Rul ... ,,r Civil Procedure and Fed!.t.1 Rul"s of Evidence Into ""e-"'lIing 

proceed/ni' 10 en""e INI1 relevant evldence can be presented In on o,de,lv aJ1(l fal, fashion. 

1. /, ~ failure of mon¥ Im~mef radio com".,rn"" 10 turn D pro[it D ,eluff of a /oll"'~ D/ IIID5I': c"",,,,,nie. 

CD adcpl rhl': right b",ineu mode/l. ,p (e5l,ff o/Ihe rolf': SI':IM9 fIIlndord, P c,,",biflOl;on 0/ /IoIIl, rxdue 

10 orller /rxIOrJ? 

~ We oon(ur wilh lhe Ia l' ~ment of Oa~>d Pakman: "The problem lmpl~ Ihal Ihe ",te! 

.Qllabl~ 10 ;nlerMt radio ~ompa"ic s unde, Ihl! oompulmry If~ ns e are 100 high. Thev f"lhten off 

nwsun~nl upilal. p.event lreal e"lfepren~urs I,om In"""allng, and kill ofl .. >citing aUemplS to b""B 

g'nt new musl~ """,ke sIDwruumerJ, American entrePfeneuriJIip and Innovalion ",quote vib"'''t 

malk~ts unburdened bV artificially high f;l:te SltuCl"res." 

1. Allhelleori1l9, )IOu Slif d Ihor Ih f': CIIffenl .y.temfrx Iicerui1l9 mIlS" was un.ullQinabie. 8ul in 

1(}(J9, Ille[o<Jnduo/PondorD, Tom W .. uergren publico/I)- indico{ed IhDI {".. <ompcny was "" ,ole 

9rDfJnd" with ",unlivoble ro)'llilY ,,>Ie. · ? 

o. When did)'llu com:lude lhor Ihe CIIff"nr f'O)IO/ly roles ore un,,,.{pinob/e? 

b. Were 1"'01 OWOfe o/Ihe p"f""rreel problem. with rhese. "'1"'lry rores ;"'/ore )'II"rlPDin summer 

1010 I/rlDl, Whol has chlHlg~dl 

: The fe"'l\C~ in d"s qu<!, Uon Is a parrial and hfghly ml!leadf~B Uloe of quotations ffQfll a 

pan on Ihe Pando •• BI,,& thaI TIm We,te.«ren publr<hed In July lOO9 altel' IWQ-YI'" M8oUa!ion Ih.1 

foUowed the Copyt'tgh! Royalty Boa,'d's 2007 detisipn which .etrate.lhat would Nve s hutte,ed 

P"n<!QfI. An . tCUr;He repre5~ntal ;' ~n o[wNt w., aClUil1y eXP'e!;""d In that blog pcK! WOijld hive 

neces!HIrfly includlMl the follcwin, li:ne that CornU late. io'I [hI': piece: 

"The system a.h .!and. 10d..y rem,'n. fund.m."ta lly unf.l. _.to Iflte'""-t flKflo 

serviQ! lille Panllo",. which ))3'" higher .OV.111t'S Ihan Plheriprms of r.d"' ... • 

Neve. h.s Pando.a . lated In any wav that lhe letms of the WebcaSier Settlemenl Act 

represented 0 f.ir wILli ion, hl,br.,hini " ... ",iv.ble" ,oyailies is n<ll lhe 80.1 of ",te SI!1ling. It .hould 

210t Webster Street 

Suite 1650 

Oel<Jand CA <)46lZ 

5 10.451.4100 

"~510 451.4286 

WWW.))3M<lI"lI.CU.l. 
173 

PANDORA 

be not"d lhallht! Illree Ia'K"U wellume .. ~llh.! lime, AOL Radio, Vahool U1~nchcaS1~nd MSN. all 

abandQl'led their inlernet 11Id>o b<l51nessei ~i Pirt of the altermalh of tile 2007 CRB webcasling 

de,,';on, f~l1hermore. it is ;mporuo110 "elle lha t Mr. Weste'l'"n', comment about. "Iong-le,m 

~gre<!men! for survivable 'ovallV fil: .. , " .pe<If\c.ally referred to Ihe Webcasl~f ~tUeme,..t IIel Ihat I. 

d",,-lo " 'ol, .. allhe erod 01201$. Ab~nl any leglstil""" action, Internet •• dio compan-...wili DnC"-

again enter a ,ale ""nonK pr<Kl!>S umler Ihe demo>l>\r;ob1v !law.m willin! bu ...... -w1I1ing ""Iler .Iamlard 

PirKIO'. dlsdo ... d Ihe unfa,.or.ble n,lure of th4! tu.refll "'\ ...... 1 bV tile Copyright Rovallv 

Bo.,d, arid Ihe uncerla,nlV fnll .. , .. "1 Tn tOO CIlrrenl rale· ... ninH 'V"em 10 In,,,,,,ors •• part of I", initial 

pUblic offering. 

2. Yo" srurl"d '" )'OUr wTitrer> u:stimonj' Iitot f'o~oro ptlY'"OU! 51»1 0{ 115 re"""ue II> royollies, f/ you _,e 

ob~ /0 RI! mort odw!n/5i"f}, which if opparemly vtry /ow compored /0 oll~' ,'tlf! to 1M 'OMum." 

music senlicts, wouldn'! the p"n:enl'ogt 0/ rewmue paid out In royall;e. dedlne' 

o. Whot p"'Cf!nloge 0/ 0 mu.1c RFII/""S "", .. nue s/lould be devoled 10 musk <oMem? 1< lhe,e 0 

mogiCfluml>e,' 

The problem.! with the r:H~ standard ~nd process for ~ttln8 intelnet radio roy.lty rale, In 

the U.S. are fUnda"",n\al and .rt n<>l sp«:lflc to anyone Internet r~kJ5t!rYl<e. The m'gnlt...:!e 01 ~ 

p"vmenl5 CU"'!Olly paid by Pandor". whleh rep,esenl5just '" 01 all r<>dio listening In I"" U.S., are just 

one mani/eMiltlon oft"" ... fundam""t.1 problem •. In tt>e yurju.lt now r.ni,hins, Pandor. will ho"e 

paid !OlmOSI a quarter of a blilloo doli.rs In r.ound retarding perform.nce royalUu, Pandor. pav' more 

in abr.olute dollars than anv oU,er ",dio (Om pony-AM/flo" , ... te llile, cable or inlernet-in the w",ld. 

I" faCl, Pandlll"ll pa\'S (IIOfe laund r~~rd;nB Ili!rforrnance !"O'IalH~ th.n are paid by tile ~nt re r<>dlo 

Induury (AM/fM, 1at lIite, cable .nd Int erner mmbined) In e""rv other Individua l [ount"",n the 

world-so m..eh more thaI Pandora', rovalty paymenli acty~lIv utHd the am",,,,u plid by illaf the 

",dlo indusUies In the UK, Fran.c:t, Canada, and A~strall. combined, The ~r POse 01 the proPO~d 

"'gislatlon ~ nat IOset 5pHlflt rale" but rather to enabhsh a ratf.n.ndard and proce~ that can 

conslsten!ly Bene'.le "'te< <onsTd~"ed lalr-and r~aSl>llabt.. 10 all partie.<. Doina so wi ll ul\lm.tltly 

benefit . ni'ls, ;"nOllalo", and the Ie", of mllnon. 01 A"",r\c:am who cheri'h inle .. ",' ",do, The 

absenu 0' sign<ficaM in"fltmenlln Interne! "'din, pa"kuJ. rly from the radkJ b<oadcaste" for whom 

thl. represents an otherwl .... !o&ical 'tralegic prlorlty, i. unequivocal proof thaI the problem is notla<~ 

01 ... les ~.e"'lion., These broadca" ~'" are mature ad "ert!sing ba<1!d businesses with malSl"" natlon.1 

and local .ale . teams and .0ph'n;<'H~d ,\'Slen" for oplim],ing revenue. Tt>ey simply dan'lsee on 

economie opportunity, 

j 511ooldo rote standard ste~ to "'1~~"llt dlS,uptlllt ,mpOCf on itodustriesl Ilso, Why} 00 IjQU belle~ 

toor morlr:el dilruPlio~ Jocifir~I growth o"d '''fIOl/or'''''' pltQI>e e>.plaln 

Relponse: The rate standard set 10fth iii the Copyright Act al 11 U.s.c. §801(b)ll) prollides th" J...:!ges 

'hall set "reasonable term. and .at"$ol rDYalty payments" to ad.e"" lour object; ....... : 

(A) To ma)6miJ;e the availability ofcJ"ea\tlle "'<ltk, to the public. 

2101 Webster Slffl!t 

Suite 1650 

Olll<Jand CA <)4612 

510,451.4100 

to • .510451.4286 

www.pand ...... com 
174 

PANDORA 

(8) To ~lfo,d Ih~ <oPVrliht owner. bk re,urn lor hl.OJ herer ... '"'' work alldl~ Wl'V'itlhl us"r ~ la" 

Income uode' ui,Ung economic <0"d11101l<. 

Ie) To reflect the re lall\'t' role, of Ine copy.18M nwnel and Ihe COll\'fl&ht "se' In the p/O!Ivet miKle 

".all3ble '0 lhe publi<. witll ''''P''(1 to ",Iall"" c.e","'" CDntribution,tedlnologlr.a1 contribution, capital 

Inveslmem, co.1, ...... and comribuL.,,, u, the opening of new martet. fo.-U"'lillt! ".pre""'n and 

media lor lroei. <ommunkat1on. 

10llo m'nimi,e any di"upI1 ... impact 1111 the ,tmelll." of the induM'ies I"""lved and"" g""" .. IIV 

llIeVi ~n8 ndustry practice •. 

This le Slandard was firsl Inaodu<;e.d In Ihe.COJIYnght Act 011976 wltll1he 'nvo lvemem and '''PIlOn 

of record l.lbel., artisr., mu.ic publl,,""~ and "'''1""11",,, II ha, """" u",d since thai !lm~ I<l guKl!. 

the ietllflll, of fit!". Ihat music I.be_; and peno,.,,,I,,g ."'st. mull ~av to .\Oogwriterl aod pubtioh£<'S for 

the USf: of thefr mu'ic- Iworks. 

While the 'wtlflog buyer-wllllnl ",If", rate'13nda,d h~,con1 .. t~nllv fatJe.d (vinu Hy no"" of In~ 

InlemON radio 'OV~lt le s paid 10 !>oUndE.llcNnge It"'" Its e'l~bl"hment h""" bole n patd pu"uaM to 

rates ,el bV jud8e. Irylnglo u.., Ihis standard). lhe 801(b) sl~nd~rd his «Insistentlv I'lelded resuit. 

oonslderEd fal. and rea",nable by ~II panles in~olved. COpYrllMjudgH Mve dearly found the bala""e 

of <o~'ider .. tloos Ihal IMI «Imblnation of four f<>e IOfS provide to Iw helpful. The BOl(b) standard 

.hould becom~ lhe standa,d fOf tnl."MI radio royallv d~te'mon",io" . 

4. W/><Jt /, Pondora'. cummt morker c,,,,? 

1'. 1$ ,'I rr~ I""r fOP CKeCurit;e. /tow! 'l'sllM""r SJS million In c","PQn~'loo:k ,iM~ '1"'" IPO' 

b. Win PondQfI' bel' fXOfitl'blel'ndwccesslulcomPQny ..,Moor Ihe crnmg<'s 'n the low you Qfe 

requeSllng? 

: The most up 10 dale fi"''''' .... 1 informalion aboUI Pandon, lrocluding the cornpens.>loon of its 

e. cuI~I. I. I'ublldv avail.bleon 1:tIe web, Including at the SEC'. web.ile, 

The.e are fundamental prob lems wi th the p.oc~n and <landards undu which Inle.oet radio royaltie> 

.re detennin~d. a, demomlraled bv the """d for Cong.~ .. io" .. tinlefYentlo" aIle' each of Web","'e!'1 

aod Weballler II, wh~h i'e 001 ~peCm(; to ""'lone internet ... dio sefYOce. The purPO~e of the 

Q1"opO..,d II'glilallon ;\ to tlt.bH,h" fllle Ilandard and procell that can <OnI~ttnllv lenerate r~tes 

considered fal •• nd re.",nJble to all p~rtle " Domg$O will ultlmalely benef'l artlm, Innovators., and 

the len, 01 m111ioo. 01 Americaru who che.i,h Inte.""t , .. dio. The ... .i1y of I~ , ate , mboolil""e 1, 

star..,v Uiu.t'.led by the ~k of """" i"ve,tment;n the C3legorv, mOil notably from Ihe broadcaster, 

for whom tl>ls would otheM; ... repre,en! a natural ",atell< priorltv 

5. The Imeme! Rodll' Freedom Acr (IRf"Aj 'iminQr~ 1M requl,emenf rhar pr~" 0"" CO/J)"ighr royr>lty 

judfl" ha. knoW/Mgt! ot economk3 nod Me 110, k"owled~ 01 copyrlghr low. PiMA, I""'r rrnde 

<I5"", .. lio ... fJ~ned to, these rl'q",,.em~nII In ][J(}4 1'5 pon 01 Ihe overha,,1 01 the prouu for ,elling 

2101 Webster Street 

Suite 1650 

Ool<Jand CA <)4612 

510.451.4100 

to. 510.451.4286 

Www,p.1ndora ,,,.,.,, 
175 

PANDORA 

fOrl" . An und",.rond;ng of ~opyrighr ond e,,,,,omK' IS ,e,>frol W rot .. prac,,~din9' before Iht Copyriglll 

Ro¥alty !loom ([R8). Wl!or "D' ch''''rI'!d smet l~J How wauld" ~I"clioll p~» 111m .allCflllns I~ 

know/edg~ 0/ copyright ond i'COlllll'tllCS of rlre CRB )udg ... Improvt ,I>e ",I,,_stu"'/} prtXeu1 

~ The pracedul1Il proposal,; in IRFA ",nee! two m..jor ch.,,!!es freon 2004 10 the prell"" 

A!Teeling the CJ{R and the wn>cMrifig indus',), first. wt'bcllSri"S "'IS still i" ils infancy in 

20Q4 Sig",tlQ11llej!.11 issues r=ained undecIded relalin!! 10 1M scope oflheSlalUlO<}' liren,;e ThQse 

q~sli()ns 1IIl" ha.'e bttn ~,ed by the CopyriJ911 Ofllu in lb. <00"" nfpasl CIUI prac~in!!S and in 

cases before ,h. fed.ral coons To rheulen, Ihat any addir;"".' quesl,,,,,. """.in, the CopyniUl! Omce 

... ",ains ."ailabl. Iu ."s,,'er th ~ """",ioo. for Ih.CRB under IRFA S""ond, Ihe ~'n""tI! ofroylliry 

pll"f1l~nIS II stake "' .... ub~r.milll~ lower than roday, ntarly a decade laic' Wbc.-e <ui g.:1"'~H 

prooedu'es sul1"i«d far Ih. leillivel\, small~roYlhr levels of, de<:ad. ~~. lod.y·, foyally pa}'mcnu 

cdiP"" rloe .. nountJ al ... ~e in I~ ,""sl majority ofc;";1 ca..:s. ;,>c \ud ;n~ca5eli ;lIy"Mnll 

cop)Irigb' F:timess today theref<l'~ '''<lui ..... the ,nurecon'pt~henJi~ p"JCcdurall'~""t;OI\Ji afforded 

~nder the Fedtral Rill"" ofei,,;1 Procedure and tlut",yh ~~peri ~nced jud~ "",10 a. thOSt'Sin;ng in 

federal diWkt ,,')urIS Fedtral dislliCl NIlII jud)(cs ",100 dQ nat loa' e. professional hislory "'ilh 

"':I'fI,,,,,i,,,, 1)1 copyrijll,t la", bul whl> mct.1the critena described in the Inl",nci Rad;n Fa;me .. Act oft~\ 

..... a iled ul1"" '<I C<)n,id~ I'CQM<Jlllic "rindpl~' and C<,)!1yn!:(ll1 tht!Oril'l' in th~ CUd th.t come j",fore 

Ihom Wt ~Ii"'''th illutl indl"idu.IS ",hQ ~til(Y thee,it"". fill' Anicle 1l1 judgcs orr full~ capable of 

mlll1l!iJn!l Bnd adjudiC1llifllj Ihe r.le-:;euing p'<lCudings. UJudgesin tile DiSH"! Coon f<lf 'he Soothem 

o;W!c1 orNe", Yo<k h.ve dQIIC ('" I<'\'c,al decade!i "'110 resp«t to public I"'rr"'"Ia!1CC rnyol\i ... f<lf 

musi .. ' worl<s pursuaollo the con~nt decrees under "hl~h AS('AP and liMI op<!l1te 

Ii. UrnJ~r Ihe antlffUjl p"""sions of IRFA, certoin OCfMtjes by copyright a ... ~ef5 are de~M1I!d as per Ie 

oMilnm vloialions, Howtller, PO ~"'ialcoH"sivt! OCfivlfies by ",ebc05Ierso~",,' (IfOSCrjlNd. TIIus, 

f>andoro and other ",L'bca5t~rs couhl presumaflly orran9t' DOjoCQII oJ ony rOlfS, aul omists and labels 

W4/IId be prohibited from discunlng' approprlare rores, 

a, What is rhe bosi<lor this ImllQla~ct? 

b, TIle low currenfly allaW'! agents /a negotiate /a make rhe prrxe<s 01 reaching agreements easier 

and mort' efficitnt. Would //'Ie ogretmeMs under the Welxa51tr Senlemef1l Acts 11101 you hove 

applauded bten pcUJble i/mFA ow:re I~ law? 

Remon ... : The .pon5ar~olt~e legislation ~~"" indl"'tell that theV'''' looking 01 thi, language 

",~f ully as lhev red ~fl the leg'llation fo(inlro<iuC\Oo" ,n the Ill'" Congre •• , 

1, In 2009, Mr_ Wt"lefJI"'n $I>~ the foi/owlllQ: "the Sl'Slem as It Slands loday remarnsf,;ndamenlally 

unfair bol/> to Inte"",l/oojo seMcU ~~e Pondoro, which pay hioher royalflfls Ilion ol/ltt /OrfIU o! rodio, 

ond lomu~'01 "rlis/s, w/lC> receiVe flO compensation ot 011 wnM tileirmllJic is plo~d 00 AM/FM radio. 

We, "long with thB Dr/1m wh<>SI' musk we ploy, srrongly support rhe e.labJi>hment af" level playing 

fitJd, 0 rTIIIy foir sy.tem, a.-articulated in 0 new bjllco!led the Performance Right. OCT (h>fl. 848! ~ In 

JuiylOJl, Pro!essar le>hn Ville"'''', wh<> supports lowering rore<; !or Internet rodia, "ddrened the 

disPQrilPeJ in mUJ;C Ilcensil)lJ In Fo/I>es, ond JOld Ihe Io/Iowing: 

2101 Webster Street 

Suite 1650 

Ool<)1Inli CA <)4612 

510.451.4100 

to • .510.451.4286 WWW. p.1n<:1O<;l1 .C1)fT. 
176 

PANDORA 

S<J WJ~II .• IIt",,,, "" "",,,,' 1" $/""/. C U/I)(te,,',> ~.",IJ ~'klllll' Ier"';;lr~JII".'rl"r",m~ 

",>"/1), fum/Hili". 1m .• ~'""M frl."tifj' " gl.,..",/; "' '~"l.\'le,,<y 11/ A""-f""'" C{JI,>'flgiJI 

lu .. <Ii'" "',,,,Id "'s.I i>I'ItW A'"'!f.''''' "rri~" "" .. ''''1'''1'''''' ''"f! r/","" 10 "'''''''''''!; (I'':r'''''' l~rrr lIrl(,1 ~ro<,,;k"<1 "!\nltl~!I. 

tJ,) )'''' ~>rH ... ,1/1 I'm!.,.;,,,,.. "II/<!.'<!,_'J,u, (.''''IJ,';~ '·> 1/J''''1jir''' "I~"-' "'1<I\/"IIU// ",,1I.4Hi,1f.r 111m t~"~ "INiII 

,..01", f'<'Y" fkrj"'>I<UKi' "".1',,/1), "'iii'" ,";';' ... "mll "")' III'"-",,,.,d "H~fI"IJ' WI""'8 ",/r..o fU,. dl,pltlJ ,ro,.,;ml$..w.,, 1 

Re'PQn .... , f'iI'Idora id~upPOn the Performan« Rigl'll sAct of 2009 and we wele deeplv dil<lPQOinttd 

(~a . havinS done ~O. lhe RIM .nd NAB failed 10 Med the ,eq e~lol (onBre5sional .. ad .... s to workout 

iI romp,omise that would re$Ot"" Ih .. dl':Co>~! old jsp~(" r:Ne' t~'~tfial radio loVa llll!S. rh~ na(~ 

",.Iity ii that the pr<>u!,, or,eUI~ In{ernet radio rovally r~!e. lor the 2016· 2020 time I)el1od wlH 

begin In leu Ihan one ve~r . T~ (u,rent ratelt~nd~rd and P(oces. fordoing SO h~"e cool!\lentfv 

faile<!, Since the ~n.<tment!>f the willing buver·willing s-eli~r SI nd3rd In 1998, every m.jor "'te 

determination adjudiUlted ulln8 Ihii standard ~al r~ '1 uired oongreSSion.at I"tervellticll. V1nuaUy !'IOJ\e 

of the Inl~rnet r.dlo .av.It",. paId t oSoundExchange have been poOl purnuant 10 '3t"".se1 byJudg"" 

Irving 10 ".e this .t~nda,d. The Issue. thai t~ Internel R.dlo Filime •• Act a!ldfellieS requ,,,, u,senl 

,(Ibn-they cannOI be held hOlloge to I"ck 01 progre .. on. roy~11V 'SS<>ecwe' which we h"ve no 

COI'Ilrol.nd on whlth the imp;l<1ed partif,s h .. e tlee" unable loallf@e lo<decade. 

8. On September 21, 1011, M,. WetlerQren w'<lle casub"rjbe" tha! '7M JllIeme ! /ladio fnime .. oel Will 

addr.,.../hls discriminaliQ(l by exlendill9 10 inl .... nel rodio lIN: 50!!!< S/olldardused 10 df'lf'rm",e .onuoJlv 011 

copvriqhl rQIS'''''''!'''' procf'"e<. including ,;QleJ/ile Qndcable ,adio, allowing us lacampelean a iellel p/ovill9 

field." Mo_ve,. Ihe IfRA dO/!!. nol adapl 0 Slondo,dJ'" Inle,nel radio rhol II id n!i<a/to Iholl]O""'nlfII} caPie 

o~dsotel/jt~ rodk). W/IOI is the pu'po5e oj}u5fijkOllonJIJf Ih. cl>onots to the SOl(bl Jlor>dorci ,II tFiIA? 

Respo~se The 'ite seUinB s"nd3fd in tht Intetr-.et R~dio FaTrnessAct i) the 801(b) i tind3fd. Any 

add,ticn.allonl"'1I1! Is Intended pri",ali~ 10 a.-u,e tNt \I.fious Interpretations and <ond 'lo", tnat 

the Copyfight Roya lty Judges h."" mad .. whlle opel"3ting unde' the wimlla bu~r willing seller ~tandard 

ale not appTied wh ~ ope,otillo'l under lhe SOI(b) nandard. 

1. D,d you engogO'in on~ /a,mo/diolollut w;lI> the membershipo,gonilol;ooS lhel ,eQres<!nI arris/S (5UC~ 

QS The R~lJfdinl} Academy, I~e AI7!II'r/coo 'et:lela/ion oj Musi<loII~ /J( SAG·AFTRA/ beJ~ """h'l} 

cQ(lg~ .. ;onol jnr~""'nllon vtO ~ '''l m~1 1!0dioJmme .... Ac/? Ifs", plea .. icknlify th ~ 

Ind,wduo/$/o'goll",o/IOfIJ olld di.cu,;<loru thor you ' t il supported ctII1' n"" alld bmodl!fltd support flJf 

tht inlt'rlel Rodio FO/Illes. Aft. 

Response: Throughout tile deWlopme nt of the Perfo,m3l\Ce Right.< Act of 2009 arod Congrenlonal 

conlldel"3tlall of that bill we wor~l!d exten.i""ly w,th Ihe membe .. of the Mu,i<:~I .. t (palilion. Ao; pan 

of that bill. this coolilion of 13~1 and mill organizations supported changing the r3le SIi,ndard 10 I 

modilled ,..,,,ion of 801(b) for inle",et ,ad;". We did not enpge in new fa,mal djICu.oIons with the 

2 101 Webster Sl.fftt 

Suite. 1650 

Ool<Jllnd CA <)46lZ 

5 10.451.4100 

to • .510451.4286 

www.pand<ml.com 
177 

PANDORA 

groups you mem,aned prior \0 .Iatl",oursuppon of tile Inlefllet Rodlo ;flle •• Act. Membe" of the 

b<oad ~sed Coal"kln .... ho 5UPPIlfilhe Intemet Radio Fairness Ac\lnclude; 

Ah:Ic,..\ Inc. 

Acc...Radfo 

W, 

Clea' '''''n'lel 

eo",,,me' £IecUOIIOC< "".ooolion 

Dllitall~ ""ported 

Dirit.11 1110<11. A.<o<iolio" 

Dllit.ol Sour.<! .nd VI""" 

['\I ......... _aqo 

HD103.'''''' 

HD ~""k) N",w<rt 

Mu~R.dlo 

NOlion"1 Religlo", er ... dc,u,.." M",it Lil:e"", Uln!rnillo:e 

Pandora 

P['oRodlo 

Radio Parod;.., 

SlIIM1 Communication< \.efo,.,i 

SmaU ~bc3,'er /\Ill.""" ,,,to ~ Oi&<tlIl 

rtuLocal Medi. 

W5Uloniine 

917 Mu.k 

1. 5t>undfl(C/tange and Pfofell<N ti..,,,«h both (I'!I"" thor the problem 0/ yo<I patting "u/ po;e, SOH 0/ 

¥out r"~n~,1 in fO~Qlly poy~nts ,,," be rewr.ed by you modifying ~OOf b<J5ine55 model and 

Increasing ;'IIu, f".en<Jes, presumo~ly by Jelling and 'unning mon CKh, ~orgin9 more lor ods, Of" 0 

combi""rion oJ /loth. Con you di5Guu tN,' 

: The,,, .re [u"uhmental f"obl~m. with oroee., and ".nd."I, under whkh Internel raGio 

'oyaltie$ are determloed afld ~.e nN spedfk to ~nv one ,nti!'r>el radio serVICe , The magnltude-ol the 

pav",em~ cu"""liv paid bv Par.dofll. whic h rep'esenlS JUII ~ 01 alt •• dio li"enl,"" In the' U,S .. an! JUSt 

""I'. ",anif""Utlon of thew fundam,~nral p.obtem ~ In the yur rUM now flnl!hing. Palldora will /lave 

paId al"""l a quane, 01 a bill"'" doll ... ln ,ound .ecordlnsl"'rfo.marn::e royahie,. PandOI'll pay. m<>re 

In abloOlute dollars thanllnv other ,,'dio compin v-AM/FM, Hltell,te. cable or Inle,oet-ln the world. 

In fact, Pando.a pays mo.e .ound ",cording performance royaltle . t/lan are paid by the entire .adio 

industry (AM/~M. satellite, cable .IO d Imernet combined) H1 every other ;"dividua l COunltVln the 

wm1d-50 much more t/lal Pandora'. royaltV pavmenu actually ".tr ed the' """,uou paid by all of thl! 

r"dio industrie,ln the UK, ~"'l"IC , Canada .• nd Australia comb'l\ed. The purpose 01 the propo$ed 

leglSlallon I. nol to .,,1 .peclfoc .ale" bUI "'Ihe. to establish 11 rate sianda.d li nd proc:e .. Ihal can 

2 10 t Webster Slrftt 

Suite 1650 

Olll<Jand CA 94612 

5 10 .4 51.4 100 

to. 510.451.4286 

www.pan<:lQf.ll.CO<l. 
178 

PANDORA 

<""""~n!lv g<!oe,.te rolle, con,ldered fa ir and reasonable 1<>.11 partie., Oalnjlso will ultimate"" 

benefit anim, "'OO~.tDrs. i nd tile tens of millions of Americans who cllerlloh nt~"'et rad;", The 

ab<.ence of slinifKan\ inv~~tment in WIle",,,! radio, plnkul.rlvfrom Ihe bro. dun" ... lor whom this 

Il!pll!~nl5an otherwi!.<! IO&ical.,,,,lqlc priority. Is unequivocal proof that tile problem IS 001 tack of 

... Ie, e>l'cuti(>n. Ttw", broadcaste .. 0'" malu, e ~verlislnl Ita",d buSI""",,! with mas"ve ""lioMI 

and 1oc31 ... le. team. and >oph,s!Juted system, for opdmllll1lJ 'i!ven"",. They simplV don'l see an 

<"<"nomk opportunity. 

1. ~w",,1 of rhe ",ilne ... ,,! hlWf' compmed Ihe con. rhol Partdaro 0"'1' for <Dillen! 10 r/ws" paid br 

NelpiJI, mill"! ondSpofi/y. /10_""" tllfie ,ervm>~ o,e Quile di/fut!,,1 rfllm "",Hlllerocrw" radio like 

P""dorQ. Con you pkale tolk about rhe dif!ete"cn in the busi~n models o/l.dw!!ycomporil'lQ rhem 

IfIT'r volid? 

Relp().Ils<!: Pandorall fu1lllamtnrally different Irom on dema~d r,e",kel such as Netfll., lTunes and 

Spollfy In thaI Pand"", <lM1 ~ot Pfuvlde specific content. ~therst"'.msor downl""d', In direct 

re'lIOn ... to a <on.uml'. feq""'l ru. that spedro, oonlem. PandOf. Is ",diu. whe.e ule ... <an Indk>!e a 

ge~(.lllrele(e",e I", the ~11III of ",ulic they like, but tannot control whal ~"gs are played, Of In whal 

Dfder. Bveon"all, on a ... ",Ice!ike SllOIifV. a ul-l!r can hn, anvsong t~ey wa(lt .• S many umes as Ihey 

wanl. on demand, It ~ effect;v.,'fa · celesl)al jukebo . .. On·de mand S<!",lcel're thus fuTld.me nlal'f 

'Ubll;lU1kmal as they lunet"'n as ,m alternal;"" 10 purth .. ing. while radio !\I'",ke. are lu!>d~mentally 

promotional as I~Y dr'ove isro~ety and incremental commerce. Th,s differe",e y;ekls completely 

diffe..enl royalty raIl'S, and In tum complelely different bus,,,,,,, models. On'Mmand 5<'",i",s a", 

&e ne ",IIy <"b<crlptlon· ba!'l'd al consume" Pl2v, &fute, w,lIln&ne" 10 pay for Ihe value 0/ M-dema!>d 

~"ening. while ",dio i. predominantly adoefti,ln&·bal-l!d, (enewn81h~ l;lei< of eon,umerwilllnl~e .. 10 

p.ly lor a ,~ io Ho"Ike that d<K's "ot offe' on·~ma:n d C<lp~bllltv , Pando .. does ofIer In adlftrtising· 

fru lUb>criPlion ve ... lon. buttke cc'nver~1on ' ale Is low, eftn a{ theverv low prke point of $l/monlh 

flnal lV. the Ikensinl Ilroc!U,,,,, are qu ill' different. Pandora 10 eli,ible forthe .Iatutoty Ilcenl-l! uTlder 

5eCloons 112 and 114 of the CooVftcht At\, On·~mand se",lces are <lOt eligible 10rlhil !lce" ... and al 

• <onsequence must enler lnlo dl"""l deal l w11h <opyrlsl'll owne .... ll>e stalutory licenl-l! pro>'lde. Ihal 

anists r@ee ..... 5O%0IproeeedsthaISOUTldElICh.ngecoIJensfor lheperformallCeof sound 'eeordin8S. 

By contrast. \00%01 Ike proceeds Ihat on·demotnd services pay BO'" to record L1~I$. 

J. Where wOlJld Pandora be right ~ow i/ C-ongrc .. IIrxt not stepped in om! the OIiginlJl rore. imposed b~ 

the eR8 under the,o colJed willing t",yer, lYiJ/jng.eller 5tornJotd hod been ,mposed?lIesQOme: II 

fotO!d to p3Vt~ r.tes determined by tile CA B in 2007 Plndora would hive hold rovallV <oSU glUier 

than all of 5 revenue and would f1<>t haoe bee" able 10 conlinue ooeralions. 

QUl1 liQ'" OlT r~ by Ranking Memb .. 1" Wau on lr r pr.,e "r alh e r~ Polis 

J. You menrion In YOIJr <!im"ny~id"nce {MIllie rer:ord indu5t'¥ !!os oct;"ely work~ losquos!! 'lie 

development 0{ Ihe Internet radio ;ndu<I,¥, Con yoo support rhot 5tQtem eJ>f? 

Relpon"'" 

2101 Webster Sl.fftt 

Suite 1650 

Ool<)and CA <)46lZ 

5 10.451.4100 

to • .510451.4286 .. ww.panel"",.c.,.., 
179 

PANDORA 

Ther~."" numerou' examples, II i~;III1~rAti,c 10 q~o«! tbe r,nal rCfKm MWMt ""Iht IIIW' 

IMIH'fIh'l'I in the ,-cry first wm.", tinll hezring "A.ro<c neg<)liating il' row asr.CI\l~n~ RJAA 

d~wluped a strlllfSY 111 negotiate dC!llls fOt I"" purpose of<:S!abli5hj~ga hi~h ~cbmatl: fOf 1.1 ... 

se.~ p!1'<:<.'<Icnt. in the .,'0111 a CARP proc:t«Iinl,l were n«~ary The KI AA Ne8ou~ jnll 

C,)O'Imill.:>e reacJl.ed a dC1crminalion ai In "hi;, viewed 11$1"' ',NeC'i !poI' fOf Ii,. Seclioo 114{f)(~) 

royahy. both OIl • p"',,,,,,,t-<lf'-r. ,,cnue buis Bod per·pcrfOfTllIlICC b ... is. II In ... proccedt:d to dose 

only ibQ§t d •• 1$ (wilh <he ncquiOOI ofYllhoo l) thai would he in IlUbllalltiol """,form,,), with thai 

'sw~'poI , 

"Numerous 1l1!cnllli do;."ln.nl~· fl'Ql1l OlOOlin. ofnegotia,li>f\s "llh many lirell~ OOI1firm Ihls 

con$lslenl RIAA ",,"OilY ' (from Wclx:a'ilinil i. CARP Rl1'lln. Feb,,,,,,.,, 21), 20!Y.!) 

In addition. lhe RI AA IUccnsfully lobhi<:<J '0 chllfl!!.!" tltcilOlfb' ",.,lIIard underlb. DPRA lu the 

willing bUy« ' '''illin8 ltllu' ~andlrd in Ibt DMCA "'~ as i{ mjoyed Ib"benttils oftht 8UI(b ) 

SlandMd rill' maklns rcproductlc.,~ (Jfn1u~lc.o.l worh und~ th~ S .... "1I00 11~ ~pull<ll'Y lic"'1~ In 

oth ... word •. Ihe recording induwy "Iili= Ih. tr.tditiooJ.! r"",.r.C{OI'§ SOl (b) "'Ie,..,n'n!! ",ndard 

wnw il i~, li~mSt'" in prC>l'«di~gs'O 'it! 5OI111wolcrs' I'Ujo'lhi«. bul ~u<X.<.$rully .dv""",,~d rOl • 

dift'",...,t \I.ndard it roll WllUld b. mort r",'QnIblcto i, "hen II is li«olor in 'he nl~mtl radio 

tOOI""'1 

1. W .. haW' ""a,d rou S"¥ thor play an PtMdoro I<an,h>l~ ta sal •• throughpurch", •• of downlCKIds, 

increasedcancert anendonce, tIC, But con you quantify r/>(lt 5piM en Pande'" troll'l/Olt lesala? if so. ""., Relponse: In Solpt!",ll\!r 2012. ~P(} Group. one 01 the la rgesl 3nd m",1 respected researcl! comj)llnies 

in Ihe U.S., publi'hed ,e,ull!.lrom in Q2 2012 .urvey of Ame,ican COMu""," I"al add,e".d Pandor", 

impact on music OUrcN.I<':" ThisSl,t(]y w U 001 cOmmlSslOfled by Pandora; "Iher, it is .. . yndicated 

"udv \MI NPD ha. run,ar many "" .. " and i •• ub.qibed la bv many diffete nll:Ompan"'s in Ihe music 

and entenalnmenLlndultry. TIle ~mpl"sile ol lhe lurve~ Is over 4,000 and \1 structured 10 be 

rep",,,,n3l1,,,, ollhe ~nll'" U.S. lnt,ernet connected papulatIOn age )3 Of oIde •. NPO'. summ.ry efll!. 

analvsll 1l;,1l118hl> two ",aJo, theme'l: 1i"I, th ~l lillenjngto Inlemel ladio, Including P~!\dofil, ~ I:Omlnj! 

primarily at Ihe e~pense of time sp.,ntll,tenlnj! 10 AM/FM; and, second,lhallhe dlscovef'/ Ihal 

Pandor. ~~blells leadins to Increased mulk purdla,ln8. ~PO's analysis,pecihcaUy Ir.owSt~al 

peop'" who lI"en 10 Pandora are mo,e lilelV 10 pu,chase CO. and dlsllal dowoload. lhan the 'est of 

lhe U.S. pOpulallon. The Jlf!l'l:enl.go! olPa ndo", lislene .. who pu,chased a dig\ral download In Q2 of 

IlIls vur WiS 32.~, [.Ompa 'ed will> Ihe percent.age af lhe .eslollhe U,S. POpula lion who purw3!ed a 

di,Tlal downloa d In Q2 mIllis yea, which Wal 12.9%, Sim~arlv, tile JH!rce nt3ge of Pandora !~I ners 

who pu"h.~ a CO In Q2 of Ihi< liN' was 18.2%. campa....t with the percenl3B" of lhe reSI of lhe U.S. 

pOpulalion woo pu rdl.""d. CD In 0 2 ofthi> yea' whl<lI was 10.1"" To.umm. rire, Rull Crul>'\l<w. 

S\lP PO, eliing NPO', Music Acq uisMion Monito. Iludy :\.lid: ' Overall mus""p "M~lnB waS down in 

the lasl vear, While Ihe averag" pandora listene, pUrcflased 29%mo'e muSkdu.inS 1M _end q .... ne' 

of 2012 compared wllh last "".,_ AddltlonoliV. Pandora IiSle n",,,,' music ilCqulsllion ca~ Increallnglv 

f,om ",,,,I purch.",., whil~ non·];" .. "..".OO-d a dedi ...... • 

2 101 Webster Street 

Suite 1650 

Olll<Jilnd CA <)4611. 

5 10.451.4100 

to • .510 4 51.4286 

www,pan<:l"""com 
180 

f 

PANDORA in ' • ..,h" 

3. Wiwrldnd, of Improve_nt. ro Panooro CO<J!dcom~ D/xIU' ,yyourr"r 5 were !aWf!I? A,e rnele 

,n/lOlltltiw' ,eMu. rhot you wouid/l.:"uld~"elop Ihot would help 11"'51$ build" bilIeofsuppa,l/fill 

,,,,,uti /)011. thor )'0" con', becOUSi' of the rare.? 

: The percentage of P,""n'a', reveJ\ue 11131 is spent on pt<l(luc' development is lowe'llIan 

1M! "f every othe •• ignilkan. Inlem~ company. If p.ndo,a', ,oV.'ly rale. w"'" Iowef, Pandora wDuUI 

terUinlv h .. v" I, ... rer finarn:!al fle.lbility 10 e~ptole new product offerings th.1 WOyid IIJr1her . dYaIl,e 

the company'_ Ic.ng-srarKIlnll obj&llve to ..... pport artlsts arid enable Irn.m to connect wkh audience, 

rhat might not orherwiS4! dlKOYer tl'leir music through traditional radio services. 

4. Whvsllouldn't allforms 0[ dlfljl,,' radio be put "ndlff rhe .,.;1/,"/'19 bu~' Slfmdorcn 

Re,ponS<!: The ' willTng bUyi!:r willi n; ~ >III"''''' r~te .Ilndard ~as cooslslemly ;~d : virtually noOe of the 

Inlerne l ,.dio rov3itles JI'Ild 10 SOI"'dh~hange since in est abl ishment In 1998 h~ve wn paid 

pursuant to rates sel by jud&!,s t"l1<1' 10 use Il'Ils 'Iandar<!. Bv conlr.st, lhe SOI(bJ standard ha, 

«In"&lentJv V",IM-d .e<uIU con<1MI·...t faj. and ,usonable by .11 partie, Invol""d. [oPVrf,hljudie. 

h.ve deartv fouod 1m. b.lan~e of ~"n~ide ... lic-n. Ih3t its «Imbin.,,,," of four ",nonabilitv fielOr> 

p'ov;cte 10 be l'Ielplul, The SOl(bj uan ~,d mould become lhe s'ar>dMd lor Intemet radio ,!>V.lty 

dete,mln.lion. 

The 801[b)!'ille standard w~.lir$llntrodll~ed In Ihe [opyriahl ACI of 1976 with lhe lnvolvemenland 

iUPpert 01 recor<!l~bels. "rtisn, muSIC publish .. ,s and songwriters. It hiS been used <tnce lnal time 10 

,uld .. tile: s"ulnl of ... Ie, 11'131 mu" " I.b"l. and peo1ormln.artlst, must p.yto J.ongwriler> ami 

publisher> for Ine useol Ihelr musk:.1 worlo.s. IU use was expaooed in 1995 losel 'at~ thai salellite 

and cable rad;'" PilY for lI1e perfonnance of sound rewrdi"l" II has ..... ve, reqrJ1",d [0"l,.,..ional 

Inlervention. 

5. Vou "" .... 0 long "'''''')I In ,he mu,;c bu.,,,,,,., D<I J'Ou thin~ if t/>estanda,d ~ chan~ ond'at'" 

lowered Investmt'nt ~nd Innol'Otlon (JIJ ldflou'i.sh ~ Wo~ld rh~, result in more 5ervlc", like Pandora, or 

beue, than Pando«J ? Wa~ld ,"" pI< ~ ult/mo,el~ glOw? 

II('spon5'!: 

We concu, WIth Ihe lalem ml of Dav<l Pakm.n. ""mure capitalist allh~ Lorge and well 

est.bli,hed r..m. Vemod:. ' 'TkI! problem [0 simply Ih.llhe rales avaIlable to inlernet radio 

companies under 1111< compul!IDrv license are too hl8h. They I']gl'llen of! In""slmenle>pUal, 

p' event g",at elll'~preneu .. f,om Innovalins. and 1<111 off UC~I"I3II~mpls 10 bnng 8rut new 

musk services to «IMumer';. American ent'ep'eneu'shlp ind nflO~"tion requ ire vibri nt 

m.rtelS unburdellO!(! by .rt1f c~11y hiWl rate structures. I am hopeful you will ,ee Ihroush Ihe 

rhe to';c olt en empl!>V...t III I:hisdebate ind makeSfllSlCIe policy b.lsed 00 sound II!WMlmics' I 

WDu ld like nothing more 11'1"" til Inveslln the many fntrepren .... '. we haYe mel who 1'1."" 

g .... tid ... , aDoul tl'le futUrE' of mu,ic. Willi a .ensibl .. ,ate struclure In place, our fccu, on Ih" 

ma"'el couk! relur"." 

2101 Webster Street 

Suite. 1650 

Olll<Jand CA 94612 

510.451.4100 

to. 510 ,451.4236 

www.pandQl.ll.c ..... 
181 

Response to Questions for the Record from Bruce Reese, 

President and Chief Executive Officer, Hubbard Radio, LLC 
182 

Questions Offered by Chairman Bob Goodlatte 

1. Over the long term, do you believe this legislation would result in higher or lower 

net royalty payments to pe/jormers and why , 

Answer: NAB continues to review the specific provisions contained in the 

Internet Radio Fairness Act, and to study the potential impact of the legislation on 

both webcasting rates themselves and royalty payments. Preliminarily though, I 

believe this legislation could certainly result in higher royalty payments to 

perfonllers. 

Perfonners are paid when their music is streamed over the web. All things being 

equal, the higher the number of entities that stream, the more performers' music 

will be played and the more those performers will collect in royalties. 

Unfortunately, today, the number of entities providing music streaming on the 

Internet remains relatively low, and the principal reason is the barrier imposed by 

high royalty rates. There is only one major pureplay webcaster in the United 

States - Pandora; and there remains a lack of interest on the part of many 

broadcasters in streaming their stations over the Internet. 

Any reduction in royalty rates would, T believe, very likely lead to an increase in 

both pureplay and broadcast entrants into the streaming business. On the pureplay 

side in particular, even modest entry would result in a significant boost to 

competition. This increase in the number of streaming services would lead to 

increased song play over the Internet and, in tum, increased royalties, even if the 

per perfonnance rate received by the artist is marginally lower. 

]. is the failllre of many internet radio companies to tllm a profit a result of a 

failure of those companies to adopt the right business models, a result of the rate 

selling standard, a comhinalion of hoth, or due 10 otherfaclors? 

Answer: As a representative of the broadcast industry, I can only speak to the 

experience of radio broadcasters that either stream their music over the Internet, 

or have attempted to stream their music over the Internet. The principal 

impediment to broadcasters' expansion into Internet radio is the unreasonably 

high cost of web casting royalties. As I mentioned in my testimony before the 

Committee, regardless of the size of the broadcaster or its audience, the revenue 

that can be generated from streaming simply does not offset the costs. This 

imbalance is impeding the adoption and growth ofTnternet radio among many 

broadcasters. Such broadcasters consider streaming as not worth the investment, 

since it is nearly impossible for broadcasters' streaming revenue to exceed the 

associated costs and royalty payments. Because these rates change unpredictably 

with each rate-setting proceeding, radio broadcasters cannot make reliable 

projections regarding their future content acquisition costs. 
183 

3. The new SO 1 (b) standard proposed ill the current hill requires that licensees 

receive a reasonable return on investment. Are YOIl mvare of any other federal 

leM that requires a private sector company or industry to be guaranteed a 

reasonable return on investment~ What, in your estimation, is a reasonable return 

fiJI' providing an olllille simulcast of a {erres{rial broadcast? Why doesn '(fairness 

require thatfederallmv similarly guarantee sound recording copyright owners 

and the owners of musical compositions a reasonable return on im'estmenC 

Answer: The Internet Radio Fairness Act, as introduced last Congress, instructs 

the Copyright Royalty Board to set rates that provide a reasonable return on 

investment for both parties in setting royalty rates, not just the licensee. The 

801(b) standard explicitly instructs that royalties should be calculated to both 

afford the copyright owner a "fair return for his or her work," as well as providing 

the copyright user a "fair income under existing economic conditions." It is my 

understanding that this language in H.R. 6480 was intended to clarify and amplify 

how the original four factors of the 80 I (b) standard should be applied by the 

Copyright Royalty Judges, not to provide a new standard. 

As applied to broadcasters that stream their stations over the Internet, such a 

return on investment varies significantly depending on geographic location, 

market characteristics such as population density and competition, and the nature 

of the technology used by the particular station. 

In the terrestrial marketplace, broadcasters do provide musicians and record labels 

with a significant return on their investments in the form of free airtime and 

promotional value. These benefits result in increased record sales, concert ticket 

revenues and name recognition. 

Questions Offered by Ranking Member Mel Watt 

I. Wilh approximately 13 major radio conglomerales ill the United States, 

thousands of labe"~, and mil/ions of artists, is it realistic to argue that private 

deals are a workable alternative to a legally recognized terrestrial peljormance 

right? 

a. How many private dea"~ between artists and broadcasters have taken 

place so far this year? 

b. Approximately how much time and legal expense is involved ill negotiating 

and documenting private deals? 

c. What leverage do artists hm'e in Ilegotiating pril'ate deals? Becallse there 

is no terresn'ial pCljormance right, are artists forced into a bargaining 

posture where they are compel/ed to relinquish their digital revenues in 

order to ink a deal? 

2 
184 

Answer: Yes, I believe it is realistic to believe that private, marketplace-based 

deals can work in the current marketplace. As with any new development in the 

market, we need to watch and evaluate how it impacts broadcasters, artists, and 

consumers; but I believe that private deals tailored to the needs of specific 

broadcast groups and specific groups of artists are proving to be mutually 

beneficial. The greater hann would be to create a one-size-fits-all terrestrial 

performance right that is modeled on the current disastrous digital framework; 

that is, inviting a government entity to set so-called "market-based" fees before a 

marketplace actually exists on which to base those fees. 

I am aware of the private deals between record labels and broadcasters that have 

been reported in the press. As a trade association, NAB is not privy to private 

deals between its members that are not announced publicly, so I cannot speak to 

the number or nature of these deals. I also do not personally have any familiarity 

with the amount of time and legal expense involved in negotiating and 

documenting private deals. 

It is my understanding that artists are not involved in negotiating private deals, 

unless they own the rights to their music. In most cases, artists transfer any 

ownership rights that they may have to their employers, the record labels. Only 

three record labels represent an overwhelming proportion of music artists in the 

United States. As a result, those labels possess tremendous bargaining power. 

Since I am not familiar with the terms of any private agreements between radio 

and record companies, I cannot speculate about the relative bargaining power 

between the specific labels and broadcast groups that have executed private deals. 

However, I can attest that the lack of a terrestrial performance right has not 

prevented record labels, artists, and the independent promoters that they hire from 

consistently and persistently urging radio stations to play their music -

presumably because they perceive a benefit in the free exposure and promotion it 

provides. 

2. Are there other rationales beyond 'promotional vallie" that broadcasters 

maintain provide legitimate basis for denying musicians and artists any 

compensation when their work is pe/formed over terrestrial radio? Are the 

rationales rhar were articulated rojllsr(fj: the exemption still relevallt today? 

Answer: For over 80 years, there has been a productive, interdependent 

relationship among American radio broadcasters and the music and recording 

industries. Record labels and performing artists profit from the free exposure 

provided by radio airplay, while local radio stations receive revenues from 

advertisers that purchase airtime to sell their products and services. By all 

indications, radio play is an important ingredient to the success of new albums 

and artistic performances. For example, according to research by Dr. James N. 

Dertouzos, music played on the radio affects music sales more than other factors, 

including local demographics such as age, race, geographical location and 

3 
185 

income.! Dertouzos further found the impact estimated from exposure to music on 

the radio to be positive and signiiicant across all music genres and radio formats. 

For example, a survey of rock music buyers found that half of those surveyed 

claim to be influenced by radio in making their music purchase choices. 

Despite the many dramatic changes that have occurred in the digital music 

industry over the past decade, this interdependent relationship between radio and 

the music and recording industries remains fundamentally the same. In the 

ecosystem created by both the government and the free enterprise system to 

reward a mix of creative endeavor, ownership, distribution and promotion, radio 

has retained its essential character: it is local; it is free to listeners; and it is 

supported by commercial advertising. Local stations use on-air personalities and 

DJs to differentiate their programming, including by commenting on the music 

they play. 

3. In 2009, when the National Association ojBroadcasters (NAB) cppeared bejore 

this Commillee, it asked that the Government Accountahility Office (GAO) study 

the issue hefore the Performance Rights Acl mopedforward. Chairman Conyers 

requested that study and it has been completed. lhe GAO found that srmions that 

play music make on m'erage $225,000 more than stations that do not, and that the 

promotional paille of radio was "1/01 clear" anymore. [I alsofollnd that slalions 

making over $1.25 million would pay 90% of performance royalties, with or 

without the sliding scale, asfiJlmer Chairman Conyers' legislarion proposed. 

a. Does NAB dispute thefinding of the GAO? 

h. [fpromotional value is unclear or limiled, what other basis is therefor 

denying royalties to performers? 

Answer: To my knowledge, the GAO report did not actually find that the 

promotional value of radio was "not clear" anymore. To the contrary, although it 

reported several self-serving record industry statements regarding promotional 

value and found that there is "little empirical research" examining the impact of 

radio airplay on record and concert ticket sales, it also stated that "[ s ]takeholders 

from both the recording and broadcast radio industries told us that broadcast radio 

is the leading means by which listeners discover new music," and recognized that 

the fact that record companies employ statY dedicated to the promotion of music 

to radio exemplifies "the importance of radio airplay to a sound recording." 

Indeed, in the new, fragmented world of the digital environment, in which 

millions of bands are vying for the attention of hundreds of millions of fans, on 

millions of web sites, one of radio's greatest strengths is that it cuts through the 

clutter. Local radio stations continue to provide new and emerging artists with 

needed exposure and access to a listening audience, not just with radio airplay, 

but also from on-air interviews and promotions oflocal concerts and new albums. 

! Radio Airplay and the Recording Industry: An Economic Analysis by James N. Dertouzos, PhD., pp. 31. 

32, reI. JWle 2008. 

4 
186 

If that were not so, record labels, artists, and the independent promoters they hire 

would not continue to incessantly petition radio stations to play their music. 

4. Does Bonneville or the NAB support or oppose the IRFA in its currel1tjorm~ If 

not, please identify the changes you helieJle are necessary to secure your 

SlIpport?2 

Answer: NAB supports legislative efforts to establish fair webcast streaming 

rates and will work with the bill's sponsors and all interested parties to create 

broadcast radio streaming rates that promote new distribution platforms and new 

revenue streams that foster the future growth of music. However, NAB did not 

endorse any specific webcasting proposal introduced in the llih Congress, 

including the Internet Radio Fairness Act. With over 8,500 members, NAB 

continues to internally discuss proposals for reducing the egregiously high 

webcasting rates, and looks forward to being part of a continued dialogue on the 

issue with this Congress. 

Aside from high royalty rates, there are additional impediments to broadcasters' 

adoption of streaming that could be removed through additional reforms to the 

copyright law. These include the burdensome sound recording performance 

complement (i.e., limitations in song play over certain time periods) and 

unrealistic reporting requirements that make compliance nearly impossible. 

Additionally, section 114 requires other burdensome administrative requirements 

such as a prohibition on the publishing of an advanced program schedule, 

prohibitions on prior announcements, and the requirement that the station stream 

text of the title and artists contemporaneously with the public performance. The 

ephemeral license requirements are an additional concern, some of which is 

addressed in H.R. 6480. 

Questions Offered by Representative Jason Chaffetz 

1. What is Ihe number one reason more broadcasters don 'I have CIII Inlernel radio 

platfimn? 

Answer: The principal impediment to broadcast entry into Internet radio is high 

streaming rates. The rates today make it extremely difficult for most radio stations 

to make any profit. It really comes down to a basic cost/benefit analysis. It is 

virtually impossible for broadcasters' streaming revenue to exceed the associated 

costs and royalty payments. Those broadcasters who choose to webcast must 

subsidize their operations with other revenue streams. A change in the current rate 

0 1 am currently President and CEO of Hubbard Radio. so 1 camlOt answer on behalf of BOIUleville. 1 

previously wOlked for BO.ll.lleville from 1984-2011. In 2011, I joined Hubbard Radio following its 

acquisition of 13 radio stations from BOIUleville. 

5 
187 

structure would allow for greater innovation in the industry and wider use of 

webcasting among broadcasters, which would create a more vibrant competitive 

marketplace for radio streaming services. These developments, in tum, would 

benefit consumers. 

2. Would passage of this hill result in more hroadcasters moving into Internet 

radio:? 

Answer: NAB continues to review the specific proposals contained in the 

Internet Radio Fairness Act, and is still studying the potential market impact. 

Preliminarily, NAB believes that a reduction in webcasting royalty rates would 

likely increase the number of broadcasters that stream their stations on the 

Internet. 

3. I'm curious, what do you think of Sound Exchange 's argument that all Pandora 

Ileed~ to do to solve this proh/em is increase their revenues, presumahly hy selling 

and running more ad~, chargillg more for ad~, or a combination of both:? It seems 

to me ifl'andora's business model was so seriously flawed and it really was that 

simple to make money in this space someone would step in and do it - perhaps 

even a hroadcaster. Please discllss. 

Answer: I cannot speculate on Pandora's decisions on whether and how to 

monetize certain aspects of its website. I can say that broadcasters have a long 

history of monetizing our stations, but have yet have to find a viable way to make 

our webcasting businesses profitable ones. 

Questions Offered by Ranking Member Mel Watt on behalf of Representative Jared 

Polis 

1. Why shouldn't all forms of digital radio be put under the willing buyer standard'! 

Answer: The streaming rates that have resulted from proceedings by the 

Copyright Royalty Board (CRB) under the so-called "willing buyer/willing seller" 

standard have been shown to be artificially inflated, to the detriment of both 

services that wish to stream and ultimately, the songwriters and performers who 

would benefit, in the form of increased exposure and royalties, from increased 

streaming. Over the years, the "willing buyer/willing seller" standard has 

increased royalty rates to levels that are suffocating radio streaming services, 

thereby dampening the growth of new competitive markets. For too long, the 

marketplace has been ordered to function based on a legal fiction - that of a 

functional "free market" - that has none of the rival market restraints and 

initiatives that drive products and services to set value. Instead, the formalistic 

rate-setting mechanism set up by the CRB in applying the "willing buyer/willing 

seller" construct ends up simply picking "winners" and "losers." 

6 
188 

f 

Broadcasters prefer abandoning the "willing buyer/willing seller" standard and 

transitioning to a standard closer in substance to the "SO 1 (b)" standard that is 

currently used to set sound recording performance royalty rates for other digital 

services. The 80 1 (b) standard has effectively and efficiently balanced the interests 

of copyright owners, copyright users, and the public for decades, in various 

contexts and proceedings. In the ever-changing communications marketplace, 

balance is a key to achieving fair and equitable results for all parties in interest. 

2. You have a long histOlY in the music husilless. Do you thillk if the standard were 

changed and rates were lowered investment and innovation wouldjlourish:J 

Would that result in more services like Pandora, or better than Pandora? Would 

/he pie ullimalely grow? 

Answer: The principal impediment to broadcast entry into the web casting 

business is high streaming rates. A rate standard that would result in lower 

webcasting rates would likely lead additional radio broadcasters to begin 

streaming their terrestrial stations. That could mean higher revenues for artists 

whose songs would enjoy more radio airplay over the Internet and increased 

exposure to more listeners. 

7 
189 

Response to Questions for the Record from David B. Pakman, 

Partner, Venrock 
190 

Regretfully, I do not have data detailing the level and state of current investment 

in digital music. Anecdotally, I believe, compared to other tech markets such as 

social media, advertising technology, ecommerce and enterprise software, 

Internet music has been one of the most challenging market segments in which 

to raise venture capital. I do not have data indicating whether there has been 

growth over the past 10 years. 

Responses to Questions Offered by Representative Jason Chaffetz 

1. If this bill passed and was signed into law, what will the likely result be for 

the Internet radio ecosystem? 

The economics of operating Internet radio companies would become more 

attractive and would afford entrepreneurs the chance to build profitable, 

standalone businesses. This would attract more entrepreneurs to Internet 

music and would allow Internet radio operators to have a viable business 

model. The result of more entrepreneurial activity would create more 

competition for Pandora and the hand full of others in the space and would 

result in more music being played and more royalties being generated. 

2. In contrast, if the current procedures and standard remain in place, what will 

the likely result be for the Internet radio ecosystem? 

Without changes, fewer and fewer standalone companies will remain in 

Internet radio and only companies prepared to have their online radio 

offerings produce little or no profit will be able to sustain Internet radio 

offerings. 

3. What do you think of Sound Exchange and Professor Eisenach's argument 

that all Pandora (and presumably other competitor companies that you 

might consider investing in) need to do to become profitable is increase their 

revenues, presumably by selling and running more ads, charging more for 

ads, or a combination of both? Can it really be that simple? 

I do not believe that point of view has merit. Under the current licensing 

regime, the costs of music content are too high to allow standalone 

companies to operate with reasonable and sustainable profit margins. 

Pandora already employs both advertiser-supported and user-supported 

business models. Pandora (and others like them) already has plenty of 

incentive to maximize revenue and I believe does a fine job of selling ads to 

brands and selling the service to consumers. 

D. Pakman 2 
191 

f 

Responses to Questions Offered by Ranking Member Mel Watt on behalf of 

Representative Jared Polis 

1. Why shouldn't all forms of digital radio be put under the willing buyer 

standard? 

There are not enough buyers and sellers in the marketplace to establish 

appropriate market rates. I do believe all forms of digital radio should 

effectively have the same rates and no form of delivery should be advantaged 

over others. 

2. You have a long history in the music business. Do you think if the standard 

were changed and rates were lowered investment and innovation would 

flourish? Would that result in more services like Pandora, or better than 

Pandora? Would the pie ultimately grow? 

Yes, I believe that if the standard were changed and if rates were effectively 

lowered, it would be possible to build standalone, sustainable Internet radio 

companies. This would encourage more entrepreneurs and investors to 

innovate and invest in this space, creating more competition for Pandora. 

More companies operating successfully will increase total royalty payments 

to rights holders and the pie would ultimately grow. 

D. Pakman 3 
192 

Response to Questions for the Record from Jimmy Jam, Chair Emeritus, 

The Recording Academy, Record Producer, Songwriter, Recording Artist 
193 

f 

Questions Offered by Ranking Member Mel Watt 

I. As a producer, recording artist and songwriter, what are your views on whether 

imposing a rate setting standard that mandates below market rates.filr webcasting senJices is in 

the long-term best interest of recording artists. Do you believe that below market rates would 

support the growth of intel71et radio and provide better opportunities for artists in the long run? 

Response: 

I have seen no credible evidence that support" the view that lowering the royalty standard to 

create below-market rates will foster the growth of Internet radio. The only thing it will do with 

certainty is lower the royalty payments made to artists. Even worse, it will further lower the 

valne of mnsic. making it even harder for a1iists and mnsicians to make a living. 

2. During Ihe hearing, Ihere was lestimony Ihat there are up 10 1800 radio services thaI lake 

advantage of the compulsory license. To whal do you al/riliute Ihefacl Ihal Pandora accounlS 

for up to 60 to 70% ()f"Soun!l Fxchange revenues? l~ its presence as a monopoly in the intemet 

radio space a significant factor? To the extent that the internet radio market has not grown at a 

faster pace, can that be attributed to the devaluation of music by Pandora's free to consumer 

business model with which new entrants into the market can't compete? 

Response: 

To clarify. I believe that SoundExchange Pre"ident Michael Huppe testified that Pandora's 

payments represented 60-70% of Inlernet radio royalties and between a third and a half of all 

royalties (SoundExchange collects royalties for other fmms of digital radio as well as Internet 

radio.). That said, Pandora clearly has a large share of the Internet radio market. and while I am 

not an expert on the radio industry. T would like to see other services able to compete and see the 

type of success that Pandora has seen. While T do agree that free services like Pandora make it 

harder for premium services to succeed, I don't want to tell Pandora or anyone else how to run 

their business or how they should make money (through advertising. subscriptions. or 

otherwise). However. we cannot have a system in which Pandora is allowed to pay a belowmarket rate for music simply because it has chosen to offer a free. ad-supported service without 

first having a plan for how to pay a fair market rate for all of the music that it is delivering. It is 

up to Pandora to decide how to make money and pay fair market value for music; it is not up to 

the musicians to subsidize Pandora while it continues to grow. 
194 

Response to Questions for the Record from Jeffrey A. Eisenach, 

Managing Director and Principal, Navigant Economics 

United States House of Representatives 

Committee on the Judiciary 

Subcommittee on Intellectual Property, Competition and the Internet 

Hearing on "Music Licensing Part One: Legislation in the 112th Congress" 

November 28, 2012 

Jeffrey A. Eisenach 

Responses to Questions for the Record 

1. Over the long term, do you believe this legislation would result in higher or lower net 

royalty payments to performers, and why? 

Answer: The Internet Radio Fairness Act (IRF A) is intended to, and would have the effect of 

significantly reducing royalty payments by webcasters for the digital sound performance 

right. Since performers receive a portion of these royalties, passage of TRFA would lower 

the payments received by performers. 

2. Is the failure of many Internet radio companies to turn a profit a result of a failure of 

those companies to adopt the right business models, a result of the rate setting standard, 

a combination of both, or due to other factors? 

Answer: It is commonplace for start-up tirms, especially Internet iinns that experience both 

supply-side and demand-side economies of scale, to earn negative profits for extended 

periods of time, as they invest in customer acquisition and brand recognition. For such firms, 

the absence of short-run profits is not a sign of failure, but rather a conscious strategy of 

investing in growth in order to increase market penetration and achieve economies of scale 

ahead of their competitors, ultimately earning large profits. This phenomenon - not 

excessive royalties or failed business models - is the primary reason why many Internet radio 

companies are not currently reporting profits. Further, as I noted in my testimony, the fact 

that investors continue to fund new entrants in the Internet radio business provides definitive 

economic evidence that expeeted profits are positive. 

3. How do you believe the proposed changes to the 801(b) factors will affect rates? Do you 

believe the factors listed under the proposed bill will provide better basis to arrive at a 

fair rate than current law? Why or why not? 

Answer: For the reasons stated in my written testimony and attachment, the substantive and 

procedural changes that would result from passage of lRF A would dramatically skew the rate 

setting process in favor of web casters and against copyright holders, resulting in rates below 

the economically efficient level. By contrast, as implemented by the Copyright Royalty 

Board (CRB), the willing buyer/willing seller standard has resulted in rates that reasonably 

approximate economically efficient levels. 
195 

f 

4. Is there any economic rationale for limiting the amount of market-based evidence that 

can be used to determine reasonable rates and terms? What is the best evidence of 

market rates? Direct licensing between the same parties? Or licenses of different 

parties under a different statutory license? 

Answer: The best evidence of market rates may vary depending on the licenses at issue, as 

well as over time. This is precisely why it is important not to limit the amount or types of 

market-based evidence that can be considered by the CRB in setting reasonable rates and 

terms, as IRF A would do. In assessing what types of evidence provide the most relevant 

benchmarks, the CRB should consider the totality of the evidence. However, limiting the 

evidence to markets subject to statutory licenses, as lRF A would do, would distort the 

process, since the outcomes in such markets are atl'ected by the statutory "backstop" and thus 

are not indicative of what rates would be in a truly voluntary negotiation. 
196 

Response to Questions for the Record from Michael Huppe, President, 

SoundExchange, Inc. 
197 

To be clear, we are not suggesting that Internet radio services need to run as many 

advertisements as traditional terrestrial radio - or even that they have to run advertisements at all. 

Indeed, the nature of Internet radio is such that there are many new and creative ways to 

monetize a service beyond advertising. And even for the advertising, the mechanics and 

functionality of Internet radio services means they have the potential to run better, more 

effective, and more lucrative advertising once they tap fully into the market. But whether it is an 

ad supported or some other revenue model, the statutory license must have a fair market 

philosophy in order to drive services to build a business that fairly compensates artists. As it 

stands, the willing buyer/willing seller standard does just that - it ensures that artists are fairly 

compensated. If Pandora chooses to focus on building its audience first, that choice should not 

mean that artists receive less than they are due. 

Questions Offered by Ranking Member Mel Watt 

I) Do you believe that rates set under the 801(b) standard are necessarily lower than if they 

would have been set under the willing buyer/willing seller standard? What evidence do you 

have that the 801(b) standard cannot result in a fair market rate? 

The best evidence that the 80 I (b) standard results in below market rates is the rate that has been 

set for satellite radio. In 2008, the Copyright Royalty Board ("CRE") concluded that a rate at or 

near 13 percent of gross revenues was the rate best indicated by marketplace data. Based on the 

80 I (b) standard, however, the judges ultimately chose a below-market rate of 8 percent of gross 

revenues (which was phased in gradually from 6 percent in 2007). Then, in December 2012, the 

CRE once again adopted a below market rate based on the 801(b) standard for the next satellite 

radio term. These downward adjustments, based on non-market considerations, would simply 

not occur under a willing buyer/willing seller standard. The judges have similarly adopted below 

market rates for the two "grandfathered" cable radio services - Music Choice and Muzak - based 

on application of the SOI(b) standard. In fact, in the history of the application of the 801(b) 

standard for digital radio, the CRE has never adopted a market rate. 

To be clear, it is theoretically possible for the CRB to adopt a market rate under 801(b). But it 

has historically not done so, and there is no good reason to allow the CRE to deviate from a 

market standard for the benefit of a certain class of businesses Why should any statutory 

services get a below market rate, and why should artists be required to subsidize companies such 

as Pandora, Sirius XM, and Music Choice? The law should have a single market-based standard 

for the setting of statutory rates for all digital radio platforms. 

2) Would you support the application of an 801(b) standard to webcasting if the nondisruption factor were removed (similar to the standard agreed to in the 2009 Performance 

Rights Act)? 

I believe that all services should be subject to a simple, "willing buyer/willing seller" standard. 

The 801(b) factors are each open to interpretation; while in one case, the CRE may read them to 

point to a market-based rate, in another case, the CRB may decide to deviate from the market 

evidence on the basis of one of them. It would be simpler, and clearer, to have a single, market 

based standard and a clear instruction to look to market evidence to set the rates. 
198 

3) Has Sound Exchange actively encouraged or supported direct licensing deals? 

SoundExchange is not in a position to either support or oppose any licensing decisions made in 

the marketplace. We play no role in the negotiation of direct licensing deals, nor do we take part 

in any decisions made by the parties to those deals. Our j ob is to administer the statutory license 

for digital radio used by services reaching more than 100 million Internet radio listeners and 23 

million satellite radio subscribers. We provide infonnation regarding the statutory license to the 

more than 70,000 artist and copyright owners who we represent (as well as to services who use 

the statutory license), and they are free to make any decisions which they feel are in their best 

interests. 

4) Can you explain why there has been so much congressional intervention into rates set 

under the willing buyer/willing seller standard and little to no congressional intervention in 

rates set under the 801(b) standard? Does this suggest that the 801(b) standard has more 

validity? 

We have played by the rules that Congress has set, even when the rules are stacked against us. 

For example, we were unhappy with the rates set for satellite radio in the first satellite radio 

proceeding. Rather than run to Congress, however, we appealed the decision to the D.C. Circuit, 

and when that appeal was not successful, we lived with the results. Unfortunately, the same has 

not been true for the webcasters. They have a pattern of repeatedly asking Congress to change 

the rules and the outcome after the fact, and there is no reason to think they wouldn't consider 

doing the same if they were unhappy with the results following a proceeding under a different 

rate standard. 

5) If you agree that the willing buyer/willing seller standard provides the best way to 

achieve a fair market rate, would you be willing to support the application of that standard 

to all statutory license determinations, including the mechanical license under section lI5? 

We would be open to discussions regarding this matter as part of a broader effort to ensure true 

rate standard parity across all platforms, including terrestrial broadcasters. 

Questions Offered by Representative Jason Chaffetz 

1) Do you feel the 801(b) standard results in a "below market, government subsidized rate" 

when it is used to determine how much the record labels pay songwriters? 

We would be open to discussions regarding this matter as part of a broader effort to ensure true 

rate standard parity across all platfonns, including terrestrial broadcasters. 

2) Why do you feel so few direct deals get done between the rights holders and the Internet 

radio platforms? 

Because of the statutory license, Internet radio platfonns don't need to do direct deals with rights 

holders; they get all of the sound recording rights they need from Congress. For instance, from 

the moment Pandora started using the statutory license, it had more rights to the repertoire of 

artists like Adele, Metallica, AC/DC or the Black Keys than did Spotify, which had to directly 
199 

license music for its on-demand service. In addition, the statutory license in effect sets a ceiling 

on what rights holders can charge for their music, because a service can always use the statutory 

rate for Internet radio. If the statutory rate was above market, you'd expect to see many more 

direct licenses because Internet radio platforms would simply choose not to launch unless rights 

holders otfered rates below the statutory rate. Instead, we see the opposite - hundreds of 

web casters representing tens of thousands of stations and custom radio services, all using the 

statutory regime. 

3) The last time the so-called willing buyer, willing seller standard was employed it resulted 

in rates so high that the largest webcaster, Pandora, would have paid over 100% of its 

revenues out in royalty rates. 

a. Does that really sound like a deal that a true willing buyer, willing seller 

negotiation would have arrived at? 

This question needs to be put in perspective; tlrst, with the simple fact that many 

successful online businesses operate at a loss in their early years; and second, with what 

Pandora's revenue is and how Pandora raises its revenue. Notable online businesses, like 

Amazon, Facebook and YouTube took and - inYouTube's case - are taking, several 

years to gain protltability but are still considered runaway successes4 In addition to that, 

Pandora can control its revenue through the use of various monetizing structures - the 

one it has chosen to primarily pursue is advertisements. It is completely up to Pandora to 

decide how it wants to maintain a positive cash flow, but advertisements are not its only 

option. Importantly, Pandora chose to massively build its audience - now claiming more 

than 7 percent of all radio listening - before it knew how to monetize that audience. If it 

chose another path, it could likely monetize each listener better. Put another way: if 

Pandora's offer was to make music available to listeners for free, without specitic plans 

for monetizing that listening, a seller of music would still presumably insist on being paid 

a market rate for its product. 

b. In fact, the rates were so high that Congress was forced to step in and intervene. 

Do you feel the Webcaster Settlement Acts of 2008 and 2009, which both passed the 

House by voice, were a mistake? 

No. We joined Pandora in supporting the Webcaster Settlement Acts of2008 and 2009 

("WSA"). In fact, under the WSA, we were able to negotiate rates for the subsequent 

webcasting rate-setting proceeding with over 90 percent of the webcasting industry. In 

other words, the WSA not only addressed the rates for the Web casting II proceeding (for 

2006-2010), it was the vehicle for settling most of the Web casting III proceeding (for 

2011-2015). 

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200 

Questions Offered by Representative Ted Deutch 

1) Mr. Huppe, during the hearing my colleague, Mr. Chaffetz, observed that MTV, Rolling 

Stone, Microsoft, Yahoo, AO L and other established businesses tried to get into the online 

music business, but each could not find a sustainable business model to make online radio 

work. He posited that the high royalty rates are a reason for their failure. Similarly, Public 

Knowledge's testimony submitted for the record noted that "what should be an innovative, 

competitive market is instead a market dominated by one company in which not one 

significant company have made a profit." Why do you think that there would be so few 

Internet radio companies generally and that so many of those would have left the business 

or had difficulty making online radio services profitable? Are excessive royalties a 

component of this problem? Do you agree that the costs to the nascent music services are 

causing their businesses to fail, or exacting too high a price on their business model? 

I do not agree with the idea that there are "so few Internet radio companies generally." To the 

contrary, there are over 2,000 and counting representing an increasingly large proportion of radio 

listening generally. As for royalties, T do not believe they are too high or that they are limiting 

the profitability of Internet radio. Contrary to the suggestions of some, Internet radio is thriving 

and will continue to thrive. Success is defined in many ways, not just protltS. Tfwe want to look 

at profit as a measure of success, then Pandora recently had a successful quarter. Other music 

and media services with cost structures similar to Pandora's and Internet radio are profitable as 

well. The iTunes' music service, which adds tremendous value in drawing people to the multibillion dollar iTunes Store, is profitable. Netflix, as a streaming video distributor, is solidly 

protltable as a standalone media company. 

But profit is not the only measure of success, especially in the world of Internet media or music. 

There are other important yardsticks as well, such as the growih and size of the audience and 

revenue. As I've mentioned before, the number of Internet radio services using the statutory 

license has grown from 850 in 2007 to more than 2,000 today. The audience has dramatically 

increased as well, as has revenue. For example, SNL Kagan has projected that online digital 

radio revenue will reach $1.55 billion in 2021 - from $713 million in 2011 5 From 20 I I to 2012, 

the Internet radio audience has increased 30 percent. 6 

We believe widespread profit will eventually come, particularly as the mobile advertising market 

matures. As Pandora's Chief Revenue Officer, John Trimble, recently stated, after building 

radio listening share, "there is a latency of catching up in the ad sales efforts," and that "at points 

in time, [Pandora's] hit that intlection point of being protitable .... [A]s we catch up on the 

revenue side, we'll hit that intlection point again,,7 Right now, mobile advertising is much less 

lucrative than desktop advertising, and represents only an 8 percent share of the total online 

Edison Research and Arbitron, "The Infinite Dial 2012." available at 

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201 

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advertising market. 8 Pandora has focused its growth on the mobile market, however - 77 percent 

of its listening hours are mobile, even though mobile online advertising is currently a challenge 

for all Internet companies9 But the potential for mobile advertising is huge; by some estimates, 

it is projected to grow more than 400 percent from 2012 to 2016,10 and Pandora's most recent 

quarterly report shows a III percent increase in mobile revenue for the past year alone. ll 

Pandora clearly sees the potential in mobile ad sales - with John Trimble calling the audio ad, 

which dominates mobile advertising, "the killer ad.,,12 

Lastly, I must point out that MTV, Rolling Stone, Microsoft, Yahoo, and AOL did not feel 

compelled to get out of the business of streaming. In fact, MTV still operates a music streaming 

service under the statutory license. Yahoo never left the business of Internet radio and has 

recently formed an alliance with iHeartRadio. Slacker Radio currently delivers Internet radio to 

AOL. And with a great deal of fanfare, Microsoft recently launched its XBOX Music service, 

which combines interactive streaming of songs and music videos, a Pandora-like radio service, 

and music downloads, all through direct licensing with content providers. (We are not aware of 

a radio service offered by Rolling Stone.) Whether through partnerships with other companies, 

direct licensing, or utilization of the compulsory license, these companies, and many others, find 

it worthwhile to be in the business of Internet radio and music streaming. I do not think they, or 

any other company, need a subsidy from anyone, much less from the artists on whose backs their 

businesses are built. 

'lAB intcTIlct advcrtising rcvcnuc rcport 2012 first six months' results. Octobcr 2012. available at 

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P'Uldora's 10Q report for the quorter ending October 3 L 2012. a1'ailable at 

hnp:liiuves1or.p:mdora.com/phoenix.zhtml'?c=227956&p=lroi-sec. 

11) ht.ill.J!W'nY.~llark~er.com/ne\@·oor!1(lB~hn~llD.~~cted~·th .. m~bo0k-google-le3d.-sigmf!.cDnt:lliltickmobik-(ld\9T1ising-uS-!mlr~.£1-"har~( 

11 Pando rd' s IOQ report for the quarter ending October 31, 2012. a1'ailable at 

htLp:/!iuYestor.p:mdora.com/phoenix.zhtnl1?c-2279SG&p-irol-scc. 

12 http:/hy,y\v.radioink.COllli ArLiclc.asp?id=2603124&spid=-2-l-698. 
202 

ITIF 

._- ~-­

Curm·/.",m 

"I'f~""'m '" ,f'/r>rn, rI~ 

1"~;'fI' ",H", -'r>1tf/ln 

."tr,. tI~" It •• , ~ ...... 

"'n '" .~""''''''' '' I. ,/" 

mw." ",.,/ "'.'''/-'''''''$ "";,,,,,,,, 

A Fair and Competitive Royalty 

System for Music Services 

Mo"y d;rr~r '" p\;"fQrm. provick COIl'um~1'S acc~ss 10 ",,,sic ..,rvic~s, ~uth 

... r=rrjal rJdio (i.~., [",dilional AMIFM O\"r·.h~·air ...dio), "'t~lI ,e 

r.dio, Ilucrn~1 radio. and jul»criplioll I1IUlic services 011 Clbk TV. 

How~ver, lilc n,les used It> det(nl\in( which typcs of m)'"Jilics c::1d, 

pi"Co,m mllst P"Y and how Inllch c.ch has 10 pay V-dry from S<'rvic., [0 

~rviCf. Whil. rh. exlscing "'rolty ')"'C'" w., <muM <0 roslcr 111110'0';";011 

LlTld fudliQlc r~ir compcns;ltion. roday il achjoves no:ilhu gC);lJ. Th. ,)'S,elll 

" .. d !O ,benn;". (h. "')"III)' mte. for mnsic ... ",ic .. is 3miq".,~-d "nd 

broken. II is Ions overdue for Cons",ss ro cO'lSidu kgi!JJlion U) '.,n.:<.iy 

,his ,in,.,ioll and '''''It. ~ bJL>",cd ,)'S,~tI\ lila! I'!'<,)vides f.i, cornl":m:,Hi"" 

."d ~"cO"~'gc5 i""o,",";OI1, 

n,., 1'"'1""" of 'h" 'cpon " th"d"k!: (I ... , t" 1""1''''' ~ .., ...r <I;"'''' t" .... I ... tc "'"'"' 

' "1>1.;", . cro.d, '0 <'1>1 ... « 1>,) .. 'he 'u rr ~~' n.L1e>...J ,I>< prtrpn.",J I n'''''''' lUJi~ 

I':oin",. Ac, "' .... ' ... "P ", 11_ <ri,," ... Itd ,M,d, In "IT,,~" .1 .. ", .. ",< ><>iu'~"n ""', 

..... ,,~ ,"_ ,h_ .:t;''''''L 

CRITERIA fOR MUSIC ROYALTIES 

T" r.,,'<r In""' .. ;",, in tho: m",;.loo,",,'I' ~oo ""Q~ m",", "',...;<<>. the P"""'" u"..! to 

... ,h ..... '" f;,. Itt",;., "'r>l'~ ,I",uid I>< f.olr ",.! ,It .. ""uiti1tg ",.,k<u J..ould h< 

"''''l''',lr; .. ,U ... ,of ,Ilt<. cri,,,,, , .... ,,,Id "'" b. • ma"", of IJI""h «>"''''.'''y, Unf,lt .. , .. 

><llInS PM"""'" <t""' ......... ,"1;< £"'''",ul" h,,,;o ..... ,,, ht.>ln_ "";cl., 000 ""'1 ........ may 

We n.r." n.L1",,~ P""<C\ d><i, W<t<>" f,~m ",ml""'.m.,., M",,,,,,,, , 'r'"m .. ., "of.I,,,,,,, 
203 

In.,. ".-p,"" ,I,c p<>I<n,,,1 fu, i"""'A/1M!'" p,rtl",t., illd""I}'_ 51OlIl"ly. """'In!'..,i,,.. 

, .. ,1<"" Jo "'" " ... ",J i"MYlr~~' .~<l)Ur1pI now ,n".>", •. Oon ..... I}'. (';t P""""""" 

."J ""n,,,,,i,iy, ,,,,ironm,,,,, ~i •• "'I",] "l',.,nnni,i<> '" both i",u",,,,,,,,, ,,,d , ...... 

• nu."" in • f'4'lirul.lt b,du.uy v.J .11_ dlft"'~"nt ,«h"""~~ '" ''''''p<t< "" ,,,,,i, 

tn<ri," 

1Ml, '"U, .. "',.;,.'"' o"J "'Yy,;t;l" ,-,,,,,",,, h ... , ""i,I,.-.I ~..- ,"n,n' "'''' .. "'yol'1 n •• ", .. 

u"f .. i, to<co..,., ("-110"" mudr ('" ho ... li"k)l> p.i<! in !\>yol'iq' F,-o, ..... "'1'1., ,hoCE04 

tho c,ntput., .,od Cu"""""",.,,,, .. I"d"'tl)' ""-"'~'n (CCIA) FA"''''" IlLI<k (., 

'"PI""'" o(I.p"".," '" rrlOf<n ,I .. ,d"i", «,,,,-rlgh' royol,)' ;}"'''n)''i;>I"' II", th.-

"'<>I"i<! by wobcao;"",,, """", "'" <>««1 W p<K'<tl< of. '''"'p.ny',-.. .-,,, ...... , ulIHk, u,ber 

digit.ol hlNd""tl,,!: pi>t6.,ms.."' FIT>!, ~ ... ",1<1 .. til ... ,,,rpr"ing ,h ... 'ignir .... , pm.;"" 

,ofd .. ''''<D'"' ~"",,, .. ...J h, mmk ...... ;..,!;'''' ,,, ,,')'.Jt;c,..i,,« H=-«<J mu.;'-" thdr 

pMm.'1 inpUt. S_IId, <omp,,;,,", .... ,,1, ,"k,. """""" ... i<co, ,u,k ..... tdll', ,lido>, .... y 

"" In'prlOr';"" ,inc. mucir N' dr, pr<rgnrwnirlg;' ,.Jk l..:lkl to<h" t1un ,.u.k. Third. 

thi • .,i,k;'., IgOOf'" ,I>< r.n th .. w.;:h.;a""" lil< P.rndon dQ '"'' p.y IIly.I<I", ... '1',,,«1>1 

of"".,nu.Oik /ilf.:umpk, S,r\u.xM Radl<», J,u, .. ,h" P'Y' ,.,~h..ed ,m ,I,~"umhc, 

,,f u'"'''' 'h"l' h ... , ."d ,I>< .. ,,''''"' "f "' ..... , tlq ~ro><l""". ' Th .. "'~.n' ,h.at 'h, r<r<c", pf 

.... ,"", d",), "" Ply;,'!; """""",,, .. ,I>< ...,,""", uf "''''n"' 'h,"l' 1>""""" p<' •• boe,;I><, 

IIK, .... ~. If ... ~Ioc-.. t,"T hd!.._I,;' Plflni>''''' nij;lr . p<r<'n .. !:<~fi" ", .. "',,'" In 

10)-.)"'" it CO!fId ''1 10 n:n..Jy <hi. I>y G",,<r.,ing Q'ur~ ,m'>l.e, 'h,oo!;h high" 

, uh,,,;rlp"'n fc .. Uf ""'" """",,1,1"11: 10' I>.>,h), 

Whil, 10m< ur the d.l .... ""'ut ,>te> "" likdy ;"0«\0 .. «, it ;. dllf",ulr. If"", lml ..... lh!..·" 

,t> d,,;,,;h. ........ hit nutoom ... "uld .. mr mw;" roy>!';';' ,in« f.llto"" I> ",,,,ur ' ",.'''~ of dlm;bu,j •• 1m,;' •. """>!i!)' <:OnM! .. "to<! ..... ".nd"d uff';,,,,,,, I>«:r"", uf 

di/f,,,,,,,,,,,, in ho",,= modd •. A I><,rer "I',,"""'h """\tid ""If> d.mn" r.i,n ... in ,erm< of'll 

equi"hl, p""cn . " >«'ing "'y>ll~ <0,.,-(loL , "'''''''""'* f>i,.""'). F,,,", • &i, 1'''''''' 

,lw1rid bc ,,,,,,~ ... ,",.l1\b 'n""" 'n" ,I>< d«;,!o. 1'''''''''' fe. ",,,l"l;"'y>I,y """, 

i"eI"",,,\; ... "" moIr ... u.. <1« .... " , ,h, "donn. t". doc" •• n . .ond Ih< I",.""",;"n u.<cd '" 

nuke tho d«~k>". """~~ It< ,I.-.. It, 1111. Scwnd,. f.i, 1"0<<» ,)~",Id "I'ply uni~"mly 'U 

;Ill p.ut1Cip.1n .... Th ........ ,h.a, ,h,,.n'" "'e-"""ingpr<><<s<.ho..kJ 'rply,,,;Il1 pl.,t""" . 

• nd ,h,u..ll pI.tko,,,,, ,nu" roy ,h, ... ,,'" ')'p< ~i '''Y.I<1 .. (1.0.. pI..m.tm plrl,y). TIl" J_ 

",K tn""" ,I",.n m.,k ",,,,r«> """,\<I ""' .... 1I1y I"Y ,1>< .. "" .,,,,,",,,-rh ... OIl.:!" b.: 

iq;i,I"", • .-0". why one pb'fmm '" 011<" romp .. ), 1")" mor< ~r too, ,Iw>.onoth<f, 8m 

III) pLo,fQ,,,,, "",,,OJ b.: ....tojrt' '" ,h< ... "'" l)pc>" of .<»'IJ'ia «,~" Ny.Jtic> fO< t."h "'"nd 

roc,..Ji"l'l' • .,d ,"",i<>l -"'"P''''''''''') .1Id '" ,f>c .. me ",I" .>nd I'fIlC"""" HI, d<t<.mt",,,,-

my.ll)' <0'''' Ie.t .. 'he .. "" '>!"'''!fiog p" ....... (,,' "".,nl)' Ii«"",>, 'h, ,"me .... d""'c 

,,,,,dud, ... c.l_ 

Th< p"" .... f~, ..,It'''!; ,."" ,,, rfI",i< royoI,i,,> ili<)"jd .J.o b.: .,....)u"c,l ~ • .J ~~ ,M,..h" 

ir r"",." • <\>fI,pct',i .. nlltkc,. c.,"'p'~i'ivn "'" "" "".01.,,00 or ,h,"" I", ... , in,,~.pl ... f'~ 'n 

a1mp<,j,Om, 1,,",.pLot.,,", OO"'pdl!."" .nJ in,,,·mw;" enml""i,l.,n. 

Inrer.pLo,f."m en '''l''''i.",,, i< <omp«!<l"" "'''''''''' di/f=rr' pI .. f"",u., o.u, h ... 

"~""fl:d radl<> ... ,<lii« ...!." In,,,,"« ,>d., .• 1Id ",hkTV ,""';'; """,,n., 1.,,,,-

pI.,&"m <o"'p ... l~~" ,..,IM .Jlu", ,I><!><o, pl..,r.""" '0 .""""d Iu.<d "tt 
204 

almum .. d'n:I.I"d...d I",hnic.al m, ,. , ... h<r ,fun on unfai, diffi~'n= In 

«-roJ'Y "''''' ,"d .. , ...... ,In~' .. "d.,,! •. 

1"t.r>-p1"tiI"" <>,mpn;I;"n i< comp«lti<>" b<too«n ""np.nl .... in~ ,t..: ... ~ 

pI.,lU,m" .~,h", ..... 01,><;11 ,,,,,,,,,<1.I....d1o bn>.><! .... ,=nr ,jili".",,,, I",,,,,,,, ,odi<> 

"""1.:..,,,,,'. 1o," .. p1"f""" """'p.""",,, ... ""Id .n~ .. ,It.: b<o, con,p'''''' '" 1""'1'<' 

!,...J on h,. ....... 11 'h')' in",,.,,,,,, 0 ' _ .R'''''"~r ' .... i "P"'''' ,.,1,., ,h.~ ~,. 

wh.,I><, «,,,in ooml""io ..,,,. , .. ndr,<h<,«1 in '" luw<, ",<s. 

j" .. ,-mu,i< romp«i,;"n ;,. ml"~;,i"" be,,,,,,,,n diff"rn' <oP)'I'ignl hold.", JUdi 

... I.n""«n <omp<,i"l: n" .. ,n.n. n. ,,'mp«i"l: "'''I: wrj',<>_ln • t()nll'<'i'J" 

"'''''i.e rn.uh • • mu\i<i'M...,.,bd be.we I~ «""P"'" ... id, M""",h,, "t..n 1 ..... ,,,,;,,& '0 ",u,i,c "f'/\",. t....,j n<" ,,"Iy 4n ""i.,i< gtUli'l' ho' """" un P"'" 

HOW THE INTERNET RADIO FAIRNESS ACT COMPARES TO THE 

CURRENT MUSIC ROYALTY SYSTEM 

Mu," ~'l'''';''' "",",Id I.. ><, ,h"",gh. f.i, pm«>, In., ","ul" in •• ~ml'<'i';' ~ """hi . 

...d 1"'1i<ym:d<,;" ,hould <'<>l,"", b<>th ,he .... '1"1: "'y.al'l' 'Y'I<I".m! .1" ,,, .. 1,,<- pr<>p<><oh 

.."i"" d.s< «1,«; .. Th~ =;on ~'" doc,;i>a dl< '"rI"'" "'pl,y '),,,<In ."~ • kj;;,u,io< 

p"'f""-'J 00 ,11<1 ,I>< <UIl'n' ",y.ll)' ')">I'n<. ,h< I~!<"l<' lUdi~ ~.;", ... M,. Th<n, i, 

.. .I" .... hnw 11>"", tw<> ,)"',.rn, ".do "P 'u 'h< .,i,<r'i. "(f.i,,,.,.. .rtd <0"'1'<'\';'<" .... 

The eopy,iehl Royalty Sysll!m Tod~y 

1""I;ih< . d,I'''' I<"ru'ng ,,, .,,,,ie in hi> u.. Ir .... 1;.",,1"1> ,0 FM ".HI) ,.hen <ht . ,,"'" 

.nd ,"".,..j I.hci, ... ,11 nm r«rivc mr.al,'CI~" ,!..I>n...x ... ,. Ifh, .. lio"",ng'" . ,in,uk ... , 

(i.oc, • ",,,,,,,.;..1 r>din h.......ta." ,h .. ~ "-" ",",,,,;,,«1 ~" i"<l M ,t..: .u..~ "'me ,,'nt O"<l 

..... In .. ,,,,, " • • "",ba, 10" .. ,,,,,, «>""'"<'1",", ,h'n .he ~";,,,,, .. «I ,«Old lahdo "ill ««i.., 

"''''I'''"",l<>n, Th, ' '''''D f<>t ,hi> dlK,<\, ... cy" , .... , U.S. «"f'yrill" I .... "'<lnp" '''1<'0,,1..01 ,"di ~ fro", ro"'f'<""'n"G ", ... 1<-.01 .""".n<! '<CQld I.bo.... 

Mu.!.: "", ~, n.vc, ... o ropyr;W><'"'''''' 1'", ,i>< m .. ic>I "'''''I'''';,io".and 0"" fo,!he 

"",rtd ,,«,roinl} Th< ", .. ".I <ompo,;,;"n ttrp>"ri~, rnrornp''''''' 111. nN .. ond Iytio<> "'. 

''''Ij;. >tid ,hc"'~!<' 0' m",ie puhli.i><, 'ypi<>llr''''' .. ,h .. copyr,g/I!, Th< ",und 

<re<>nlin~ "'''''''' of 'h< .o:,u..l _nd, . n.! ,I-.< i"'''f'"'''I"," • ..r ,I><- rnm1<-.1 """I"'~j,.n 

by ~!< I'<,fo""i"l: .. ,;., •• IId ,I><- """tJ 1.01..1 """,111 b<>iJ> ,h;, "'I')'I'i.:h'. U,s, I.w 

""nip<> , .. ",,,,1.1 radio fn"" p.)'I",~ P<fIO'IIUI\O<' "".01.,. (0. "",,,d .. ",.Jln!:, ,n ,h,-

"'1')'Ji&i>t OWfl(f_ H~, • .all ~,I><-, n' .... "'><,vic".. i",loJi,,!: In,em" ,.oJio ... ,dlhe .-.oJ", 

.oJ ,,,1>;, dij;i .. t ,n"'" "",... m ... ' p.y ,,, ,hi. 1"'",,,,,,,,,,,. 'igk 

Ilo.f"1< 1m. bo\h '<fr<>"i.J r.di~."d In'''I1<' ,..diQ p.id rt»'m;<>"..Jy '0 'h< «.'prrl!;h, 

...... oc, f ,!.. ",wl",1 "'''''I'". i,;''n. ,h." p_IJ n~ '1»',1,;.. '0 'ho <Cp)'l'iZh, o,,"n<l d ,h. 

<uu"d """,dins- A5G'J'. !l.\-tl ollIO SESAC. ""<h,,,,, pufo,ru . ..... rWtt$ o ..... il.l<lo'" lo 

.... Uni,"" $'01"" <uII"" <I""". ruyalrld ", ru~>",;01 <O"'I .... i' .. n •. Th< Oij:i'::.I 

Ptrl&< .... "", R;g.L in Soond R".'Dl,dl"l>' A" of I 'J'J~ (DPAA) m.,..,J "«opyriglu ~"'IlC" 

• """ l"',fO,,, ........ tigh' f<>,- 'he JiJ;iw 'TO"''''''';'·,,,, f "",m! ,,,,, .. di"&,. n.. k< 4<11 .... j 

,h,.., "''''£''l~ 0( dij;l'.J If2""n",i<''''' AM/FM b..".do.., , ..... "'''''''".. >v.1»<';I";on 

,,,,,-,mi"'''''' ( .. g. • .,.bI, ",1.1 ,..,.Ju,.). onJ ",,-d<"m>nd ,,,",R\ii>.,,,, k". Rhip>uJy). 

", ......... ,,,'. ",~ ... ,."" ....... ", .. , .. ,1> 'O~HD,I',,)'" "~"u,.;ou 
205 

"fh<, II", "" .. mp,«I b,,,od,,,,,, " .... "''''';,~ .. ft"m ,1>< p<rn"m.nce <iI;h" ,h, .. ht..mc..,,,, did""' ...... ,~ r.t "'yaI';" '" _'''''' of ",un,j..,,-rutdi"ll '~Pl'''I;IrI>. Th. II,~.I", ",'>no 

• '''''''''')' \Q' ""mp..b.:.ty) Ik."",~" .ub.<"F'''''' m",ie "'rY;"'" lI"cl.;I ~". ""I'rriI;hr 

_ .. " ~1 ngl,,,, ,0 ""\;'~ .. " 1lt<".. .. l<.r "'" ,,"..demand """,",;"'.", "r ,1.<1,-.1<-

1""'.lIy"''' orR!> di,] "'" .odd .... ~ .. ,I>< ",un.! .=,di"g P'·,r""""K< "','rril1<' ",,..Jd 

"'I.ttI~ ,,, ,""~"" .... ,,~' ... ,,, ".,,·1,,' .... ,;'<""'"0 •• ,.11 .. I",.; ,,,, ,..J.,. I ,u~ .. u,)" 

I~fi. ~", .i.lo" <>f,h .. Diglr..l Mill."";,,," u,p)'ricn' /11;, (DMCA) ""","JcJ "'" 

"'I'1'i&ll' bw '" i"dud .. ,h.,:.: .. ",k .. , i"d"dill(: wci>< ... ,in&o .... "P"'''' .... ,<g!>I)' ",bi«' ~ ,I-.. ".H""")" lie"" .... Th< l>w cM,;nu"d ," ,x'"'F' ,,,,,,,,,rioJ r>J~, . ;,,,,I.oi"g dq;; .... 

, .. "",n..I ,odil, (HD ,od.,). fwm ,hi> " .. u«>ryllo<n>< ..... " ,n."'~h ..... h ],l(""c! .. J., 

.<lid HD .-..Ii<. i"""' .. ,h<digi .. 1 ".",m;"joo "f "" ...... ' n... DMCA dld "'" i,,<1 ... , 

,im .. I".", ill <}oj,' ''''''''I'';''''. 

""''''''''01)' Ii..,,,,, J'IO>'Ida.1I ,"till ....... In«:! <.n.i" < ... dIM", til< ~t to ...... 

""rrr;;tr',.J I.",k ,,;11>< .. , "t.r.inl"~ .,,'"""" from ,~, '''I'r';j;I1' ."""",. Fo, ....,.,rk. in 

.It< a.;.' of ""un<! r«:wJ,n,", O"Y we~<f "'r b""tb, mll>ic ,fi' I"Y> ,he .... ,u,,,,>" 

/<Jy>I'Y r...nJ ,," ... W"'tn$ of,h.',",I"'~'l' "" •• " ... Th .... t<fln> nuy includ. 

"""ie,;"ru .""h .. how .uny ""'!;" """Y ],., ..... ...dc .. , Ii."" ~ r:micul.u oIl>uOI 0 1 .,,"'. 'm 

• gi.en ',n'" ~,Ir>d, WI,h ~ .,.""'''y 11<<n>< ,II. "'<~1<l d,..,. ""' "O<"I! 'n o<gOtl,"e ~ 

lie, ..... wi.h 'Ir«\>j'yti~" h.ld« . .<IId ,h.c..'W'iI;h1 hold .. _,,'" de"~ ,ft" ... ,,,,=<,,, ,h, 

'i&hl ", bt" .. ,k.." hi< ,,' no' ""rk. 1",<,,,,, ,;J;., """P"'''' par ,I\< ""~"''l' li«,..., f ... 

~So.od f.<elu"S", 0 ""n.prof" iodu,,'Y ~n'ur''''h;cl, rJ,.., ,od~"lb"" .. tit. mOIl<)' '" ,Iu:-

"'I'Y<W>< .'"'''''' r",ru,«I ."),,,.nd ,","·f.,.,ur«l .n;'" ("",I. .. """.fea",,",,, m.,id.", 

uw! ..-..,.l~ ... I, Th. ec.ryrlj;h' Atbi",.ion Ror.hy P..,d (CARP) o~tulI)' I<f "t .... J 

«,""!i,, ,be " .. u<o<y!ic< .... , J..,w<"<"<t. ,t.< CorY'iJ;It' 1Wr>l'l"M 0...,;11.,,,," Rdiwm 

1\<, of ~(~14 «pi"'''' CllIU' with • ,,..,,," "r .hn< J"ds<> <on ,h. c"py,~h' Roy.ill)' Bo.,J 

(CRB).Ci>p)'flj;h1 ..... ""f' ,nd .. cI"".-",,~ (on .... tl>< " .. f., tk.n""", ,h".uj\I, >,,)un, .. >, 

n<p>rb.,;"I", if d"" uil ." , ....... 'n 'I;""""'RI, d"'yr'I$'" tit", 0.20< ,,, ~ eRB J"dl."" 

WM then <I., .... ", .. ", tit. "'<> ."J te""'" '" "'" '''''''''ry lit.""" • 

TM Inll!md R.dio F" meu AC"t 

Earli .. ,h"J'd'. R,I". J...," Cuff<\>: (R.l1T).Jo.r<d 1'.,1" \D-CO). 0."'111 ..... (R·CA) . 

• oJ Zo" !.r>li;r<n (D·CA) In ,1l<' Ho,,,,,.,,d Sen, R.,.. Wr<l.!I (D-OR);n ,1><5,,,,,,. 

;"wd",,<d H.R. 64,")..,.j So YiCI!l, ... "...;'<ly. rJ" In",,..,,!Y.:I" F ... ",,;o II" ,,;2()12 

ORfIl). TIt;, Iq;i>b,,,,,, w""lcl """,n<! rJ" ~ ..... ,i"~ r''''''''' fQ' mwk '''Y'lt'''';ft f«I<.~1\I 

"'p)~I~' J. .... ...! dunj;c ,I-.. >t • ...!"d ..... -.I 'It KI ft')'>!I)' n'''' f, ... th.romp"""'I)'lit<R>< 

1<>, Inl<m"..clio. Tt.:- lRFII .... , ,«<;,,'«1 .. 1""''''''"1'1'''" from ,0< i"''''''''!Y.:I .... 

Fob" .... c..>li"dn, • 5"'"1' uf W< ...... ", .. "hu ... P'~"It'~ fI,. Iq;ii.I"iun to <\u.1'I\" ...... 

"'pI'r .... ~tl"g " •• ,bid ~" 1.""11<"1 ,..li<o.' Tht ",,,.t >.1<0/ '"pr"'''~ of ti, .. l.1;br.,."" I. 

I' .. """ ... ~" I RI<rR<' .. clio <~mpanr ,h .. ],dl"", ,ho, ,h .. Iq;1>b,;.,,,. if <" .. ,<d . ,""uk! 

>ll,,..,, '" I"'r oiS"it.c.ntlr "'" in mO'1< .."..1,,<>. 

The I!U'II "'nw", • mrml'<' .. f d.mga 1lJ ,he ",mIT< ",,,,k roy>lty ')">I'm. 11.>111<, ,h.D 

"I< ,II<' """"1\ · .. illln,k.)'< .... "'~II"g .dICl· ".n<!;r.n( 1<., ""'ng .. .,..01,~ ''''"' ,I-.. IRFII 

""uld u« 'h< " . nd.ocd ","',,,ly r<><d to <I. ... "", .. , ... ,'" f .... ""'" .."dlit<.nJ co.M< TV 
206 

'"""'" ,I,.~o"'. Th~ " .... brd. ~,,"'d '" -..," "0 I (h) .,(,1>< C"l'yn.;!" ......... ""Id h ... ~ 

,""CRR i"'W>'''' .. r", "-l o. '" roti w.4n~!Wr ~e 

T" .ifo,d ,,,", «>!>)'TiI;h' _1I<f' f';r r<l.m /i,r hi:< o, ... ,',,·,,; ....... '.. .nd ,h. 

"'ryri&h' _,. f .. , i" ... ",."pd,~ •• ~,;"f; <"«,po"", .. ""'10,,, .. , 

T ~ t<fk<, d, ~ ,d" ... ~ roI .. of ,t.. "'1'l"~1 ~ ... "" .od !I", <"I'Y';~' \I"" in ,I>< 

p..,du<I ~< .... iI .. bI< "' .... puot" ",;rn <'<>pccr III t.l .. i>«"",i .. <o""ibo,,,,". 

,«lmQkogK-.! contfiburion. "pi!>1 in' .. ,,,",,,n,. ,,,,t, rl>k .• ruI CIlm"oo,lo" 'Q t"" 

,,!,<";ngQf "' .... "",ric"" IV, <1""''''< "'1'''''''",".00 ma!;" fu, 'hdr 

«Imm"ni~icn 

T ~ minl,.;,z "'y d~"'p"'. ;"'1''''' On ,h, "n"'w~,,f ,II. ;,.,J ... """ in""' .. J .ruI 

on ~oI y p,,,,,"lins inJ"",), pr>C1I=. 

Th, ~ub ic'. in""rsr In booh rh< <,,,,,Ion nf ..... _"d """rdillj;>l ,\f mu,kaI 

.,,.,,1<>.00 in ""''''"j;O"nn< and 00,., dOj;irall",formanc .. of .... ",'" ,«ordie!:>. 

The I""" ..... _<><.Ifr ,n I'"",>d<, ,e<o<> ... bkMurn "rlall ",I"",m In..,,,,,,,,,,,,, 

In<l,,ding in .... ",."" 10, p,,,,r 1""""" fi" whkh «,",,,. h,,~ "'" 1>«" «",a!, 

Mll.lny, tho IRFA Jlt." .. ,II< eRR lo~ ",.hld. hr til. foll.'wl"G:"'ndi,lon, w .... 

<>ubl"hi"j; ,,[<I, ~ 

51,.11 <>,.J,I~t. Hcrn", f"" "ru"",,,, ,Iu, ","'O! "''''1'''''''''" """'ltj; "'" 10<<< •• "" cl .. ".!>il ,« .. "Jln~ p<,fo,,,..n,,,, ."d h..,w«n ...... nd _tdin~ p<,f~"".""" anJ 

,MIl« rroS' .. mml .. ;. in<ludi"l;)l<, ..... '" I""rtngnm f .... 0' f",,«nup' " • 

..... n"e or ~rh<-r f ... ", 'h" iod"do <>rV<'-OO" ,'n .. P'''''''' b .. i. fO, "","d 

,,"<"Otdinl:' ,I>.. 1",10,,,,.,,,:< "f.,-hl<h fl. .. """" Ik.ru<-d <i,h<, d,,«,ly .... ,'h ,h. 

'''I'Y'~, ".,'ncr ." .. tho: ...,.,<C •• ," t'<>, woid> • lice",e i> "'" "'''<><11)'. 

SI"II·W" r~1I ",,,,>d<t'>,.,n fu, th .... I"e ,,f .ny PM"",,,,,,al b.o,,~, ~t ,~h<t 1I(l" ~ 

'''''''''''Y bondi, ",,,(.,,,«1 un ,II< C('\'Y''W'' ..... ,'" hr ,i>< J'<,f""'''''1<'. 

st."1 ~ ... f,,11 ",,,<>:I,,.,;,:." '" ,I>< ",""ibo,;",,,, ""d~ br til. dij;i .. l ,,,dic 

tr;mom;"';"'n "'IV;« '" ,bo """"'''' .nd " I"" c.fil> rr'W.Irt,rni"~. 

51u11 rw' ,.1«;",0 >«wo' <i,her ,ho: ,"'".".! t<f"" p"".jd.,J in 1(0:,,,,,,, [," 

1"",.<11", .",nil:." " ' th. d«ortOi" .. "'''' ""J,Ml "y ,!.. C,l'rtit:h, R"y,l,y 

JuJI"" p,io' '" """n:.'"''.''' 01 ,I>< 1"«",,, Radin F:tl,,,,,", A« mlQ\l, 

_. 
207 

q".I,fia!i<>,.. 1<" tho )\1<4;0 !\>, tl>< CRB (d ... IRFA "'oLoki 'n"""" tl>< yu .. dkj;>! 

<>Ip<ti.n, .. r.;, th< judi;"> .,,~ d"'r , .... '''Iu,n:m,m !Iu, .. I""" <HI< iud!l' Iu", ,,,nif.uru 

""""kdg< of """·">n,,,, .. d O"e juds< hi,. 'il;nif>ca", knowl • .Jb","f o>pytij,4n 1.. .. ) and 

how, .... iuJt,-<> .. e ",,=.0 (<u" ... ~y th<.c-Iudl:<' or. «ket"! hy "" 1.i~ ... ,1.on ,.r 

c.,.gtc», ' .... IRfA d","1,'" 'hi> 1" ,il< Pr.M,,,, ~rd,< Unilt<! s."", "ith th.:..,M«.nd 

..,,,,<n, u; ,n. S<tI:,,<). 

"'",lIy. tl>< IRFA .... ·..,Id ",..j;" ""fltbe, ,.r.~I", t«hni<al du"IP b, tl>< G!\')"i&/>t A<1 

.. td ,n.: "'''''''"'''1; P""'" !<I, """pul."y H"" ..... n.... ,,,d.&, «qui"""'"1< .Ix,", 

'iglu< ~ m.h <I"",,,,,,,..)li.o. ''''''p''raryl "",ia uf , "'LOrni,,!;" p.n ~"~P" "";"'''' 

""Iu",,,,,,,,,, on ~,in~ F'al.~al Ruk:o <>f C",il rro<<J" ... "J F«knJ Ruk .. ,' E.id<oe< I" 

p"><.xJinp.~,,<I "''l"l,,,,,,,,,,, fo,' tb "" ",dl"i.1 , .... ..,."" h<CRS·.I<g.>1 ml;"il' {I.e. . 

,I,. """" do<> ",,, rl..,&, ,,, ,b, CRIl" "illnpj. 

Comparing 1M Cur,ent Royally Sy.tem to 1M IRFA 

a.:.rty ""i,"", ,I.: ... ,,"'" 'Y""'" "'" ,n., III.FA ""io!j- ,ho:- f.im"" and "'..." .. I,i"" ..... 

<d,,,," ""din", I" "'" I"""~.'" "",,;"n. Tl><ob""'", f.~I"~ i. t/u, ,he IRFA d.,., "'" 

odd,~ tf>< f.o<t th., ,,,,,,,,rial ,.die P'Y' "r~1i<> f'" ",,,,kaI "'fltp"';'"'" t.", "'" J;>, 

"",,,d t_,Ji"&,,. "'hik ",b.:r mu>i< ... · .. 1«> tit"" p.y bo<h 'YP'" "f'~,;"" Ifc,,"~, ... "'<lIl,ed til "'caJ.· , f'<',f;lt"'"ow ,igh, 1<>, "",nd rro>rdl"ll" It ,hould I",.. do""." f,)J .u 

",chn<>l",i<> •• ><l '",'>iHJ:I~t,.,,, A.\IIFM ,ra""";"",,,, 1'0, 'f""<w ,"<mption. Til< "",,!.oJ 

oftr. .. "m;""'" , .. "old'" ""'I ..... ,, ,~J""~,, .. Q" whnha ," """~ 1;<"" po;nn,m,"" 

""pyrit;ht. U.,il .11 rl,'''''''" .. ~ ,<qt,;,...j 'u 1"-1 ""til "" ,"d ,,,,,,,dl"J ."d ",,.,,,,.1 

cun'l""'i';"n "'l'.hi<o. "" '''''"'''' or""",~;"I:'ho~, dx m....,.,i"~ P'"'''''' w;U .dd, ... 

,hi. ;""",,mt i"""It..,j;ty. Th.~, )""h ,i'>< o"';"C rupl!}' ,}'t<m.nd ,ho IRFA ~I ., cr,"'1< 

• f.it ')~''''n . 

Hu ... '""", ;' ""Y'PP"''' ,"', 'ho I RFA ""uld "", ... , I""" • ""tglt\.>lly f.I",< 'Y'''m ,"'" 

"" 011< in pl"".<>d.>y ,i"coi, "',uIJ mo", I",,,,, .. , ,><1;" .... 1<'" '" '"~ .. tn.lIIll(~) 

".",b,d ,Iu, " • ....1 by .... "lU .. <-.!"' ,,,J c..hl~ TV .,",i< <h"""d, (. ,;,"~ .. "'l:"""'" 

"",k! 1>.. <wt ... d "" n.,.i", .. «III", ,nd ~.ohI. TV '0 ,ho: .. ;U'''Il i>uy«.",iIIi"l:><Ikr 

".nd",d). In f""t, thi." ,,,., 11<", "'"'11"""'"" by "'PP<>"'" pf ,he 1q;;.1 ..... n. ;"<lud;"~ 

G"l.... !}' B..o,,,,,,., th< Dip,.I Mod;" A>\O<i .. ion (DlMA). ",Ito, mmrl.irI> ,h .. tho ... illl"l: 

1to')'<~·w1J1;or. <dt.~ "''''''rd io ""fai' 1><'<"., ..... "" ",he, r.,,,,, <Of Jip''" ,.di< ....... ,1<1 In r.r. ,"'",h" ",uti< ..... 1It :di-=m<> "nd", thi> c ..... ""(I"~.""d,,d.·" H""'<V ... ,ru" cWrn .. 

""'<n,;,dr"'~u'.", Whil .• """,t ";t.n..i' "Idlit< .. cl coMe TV m",kdunn<b "".,.,. 

""d,, ,il< ««ic>n ~u I (\>J ".nd"d. it ;, """'"<c 'Irq .... r< );"foof .. "'ral in '" ,ho. nth", 

'y"<m. Th.o.,p)'ng'" A<I i""l"d<>~ numb"..r rnWi>",n' 'hot I',.,i, ,n">t,,,\,u,d ,,,~ 

f ..... 'r<dli< CU'"I"""'" "".""nopl<. with '<V'" ,tl ""dill< .><Iib. ,h<" .. oJ."d d .... ''''' 

'prly'" • ... ,dli'<dl~I .. 1 .. ,dito",,..k. th .. " In "I'«.,;"n. '" th .. " li= .. d by tho 

F<J.,..) Comm"n""io", o.,,,,,,,i .. 1o,,. ,>I, "" 1><10,. July 31. I !rj$."'" "''''"P'';''''' ~ 

Siriu,XM R..dit> w""ld "'" f..U un';', ,h""'nd.r<I." ,imil .. d",,,. ilJ>l>ll",,~' fit"'\< 

.... .,., "" <">bl. ,d<v~"", ""d gr>ndf.d"'t> in "".oJ. "",je", p"",iJ..J O)t ",mp.nla ,"ctc .. M"ulc ",d ,\ttl'i< a....K" how ..... o><w""" •• <> ."'''''' <ubj<ct, ~ 'h~ "tn, .tand. .. J 

(inJrnd. th,re ". "'" mM< <i>tuf'<'i ~" '0 ""''' .,( ,h ... .,...hj, TV ,"",i< ,"""',ip"d" 

", .. ic..~ .. b'I;" 1''''' b«-,,,,,, n .... om",,,., _"IJ b< ,"bi«t I<l hl&/><, ",y~!J' "",,)." 
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,od ron'f'<IiliM. "" "",,<I ",~kr, il ;' "".,ly l"'p' ... ;~k "" a.~ '~>f'«itY f..i, ""~;c 

,0)'21,,' ", ... Coo&t"" ann ... ",. "r.lit" ,.,. Fo, ",,,,I<' rlIj'>I,' .. '''Y m"l< ,ho" ;,Qlj, .... 

"f ~o u« Fo, lI"""io<, "",.i. ,id«> or !..ool>u,SC'" Wl", Co"~.,,. ~>" d,,;, ",,,.,.,n.. rl>< n' ....... ring pn",.,... ,,·h,'lh .. I, b .... fr •• m1l1m n, .... """' p''''''''. b r.lir. To tho, 

""d. InF =,,,,,,,,,ad. ''''''' {h ... ~"," 

Fl,,,,. c...,,~, ... ,1 •• ,ld ",,;r •• ,,.IY"Wly .1" 1"""'''''''''~'''1'1'>i;I'' f,. " .. ,><I ""Jh'l;>~' 

011 ~""d"""L T\l<<o'f<I1' "Y'''''' J;'qi""n"",.If""" ,",n-'<f1"'i,i>l rlW,i<"«",;"" ~y 

i'ni""lllj;' ... ~Form.n'" "'I'1,ip" ~" .. ",lUI rm"ding> f<" ,II """",,,,,,,,,1.01 r.odi" 

~",a,J",>< •. QlJ'P'" .l>.>llM P"""~< {,."(Io ... I,'SY"''''U''.t polIi<i« ,~ m,." . F.tit >IUI 

"'"'f'<Ii,i>"< ,n"k" iV<.1I fu",,,, vf ,.wi;" N", o"ly""'" Ihi> Cll<ml""'" Fo, .. ,,,,,,, .. 1 nJiu 

diuJ,.",>&< """'I'<'ing ,«h .. ~"l;i<>- ~ """ ,<" d", in urlliol, «>"'1"'"",,10" "' 'h< 

Inpyrighr hold"". O,"~''''' ,,,",uld '..k< ... ..u.mc"~"I'p ..... ,h." 'h" ,,,,,,,, ... i>l~" 

In,,,,,,,,, ....J .. , .. ,tll'''' ,.0<1 .. 'rid 0'),..,' dis,,;aI .,wi< .. 1Vi, .. <.01' """'P'" foldr. I .... h<t 

wMd •. <v<ryhody.h.,oJd P"l' (.Idly). Or oobudyu",uld r'Y. n", ,h. d.,,,,,,~,h,,"ld 

b. dimin .. aI. T<,,~,o'I" ...J ... .t.."uld {M J;.., ,Ilt "nly '",hnolugr pLo,"",,, "'<"'P' fr,'m 

P')1"!; ".yaJtl<> (or r<rli>r"",,,,<s <,f ,",,,lUI ",<",ding<. 

S<xllltd. u,"1;fO> ,f>;,oId "pl",. ,IK b'Qi<cn CRB "l''''''" ron "",in, n.>y.t'Y r"'" for ,I>< 

''''''''~'Y 11« ....... ith , d~n ... I<-, " ... k«-.driY<" ",..,..,,)"1; ')'>Icon. J .... , ..... f"lrUw .... 00 

(:>" cl'luj;t '"0'" fo, ,ick"" ,~ i" <o,nfi" 'ho" '" unpopul .. \J..>.ntI, "', ."AI"",ld ",,,,ici;uu 

IK obk,~ Ii"'''''' 'l><rt m.""''' JlfI'<f<nt .. '"" T" ,he.,,,,. Omi;=' .n. .. IJ m>nol.,c,h" 

, ..... Lihr.oly ,>feo"!:,,,,,, in "..." .. "hlp wi,h S<lun d~ < ........ 01=",,,,,, d"."ho;.. 

of.n "",,<HI ",<",dlnp.<HI 011 ..... cnpy,iw., v~·n, .. " '" d«<l1"u", ,I>< ''''<I'CIf)' Ibn", fate 

filr ..u. "f th.i, work.. TIl< d .... tw. '«Iuld 2.110 ... <npyrlj;lu """","~, '" """,dj' "I"""c 

""olty "'''' r", dHr«<", 'rr<> of ",,,,k ",,,,ka, boo], br 'YI'< of ,cd"IQI",~ (,.g.. 

'<II"'''I.t .... <lIil<, ",!>Ie, In'''''''') 'nd 1» ......... kg.. ""mrn<m.J .nd ..... '"""'n",..·rcl.l). 

In oJdi6"". eo"""" >h"uirl ",I,th .. 'oy>l,,.,, ""' 'M'Y If .:opyr;p., ""'ncl> <hi_ ...... I" 

'p«ltY .... t<. Thi> ]"'Ii<)' ...,"'d . 11, .... o"ljm",. "'1'Y,igll' ,>WI"'" "h" "'n' <0 <h"~'" 

loy>lol .. '~'I'«ify. My>l,y,-. Ti><>o ,.,'" "",,,Id b. publi>h.d onli"" In.n d~","laIly 

"' .... ibk fi;1f"," fur ",",Ie ><fVko 1<' ocr<'O~ To limi, . mu.i<",,,,i«·, poc .... "W li.bili'Y 

f<" hr" .. ,k .. 'in~.""n;,' """,in'"m ">r.I,y n"' .... n'h..~ typ< of .. kgu"d .lK>uld 0."". 

Tho<du"1:'" """,Id add«.> koIh ,ho.' ( .. ,,,.,,. aad <ompe'iuvm"" <n'«i. whlk 

pla.c"";ng 'h< b.n'r.,~ <lr. ''''"'''1)' 1 .. "<"", II ••. , rcdu"cO <r,mo''''",n , ..... ). \Ii~,h "ll'rd, 

"lmt:<>. ,hi> r'o~ ","uJJ m.It<,I1 pl.,k,,,,,, ,u~i«' , .. '",' ."'"" 'Yp",.,,r"'yai,l .. 

"od V_fu, .... ,;"1; ,no, n .... 111;. r~ .I", ><ld"",,~ ,he""'IIp ... i,;« ........... 

The ",a""n nf. , .. ,lon.ol dJ. ....... .. f ... 'unJ r"""d;nli' ... ~h "''''''I'''M;''ti'<,';''',n""". 

"'yai'Y r"" """,Id .11.,.. WI'l'l'\i:h, hold«> "'.\oct ",wi< "'Y"'Y f,,,,, .. ",mp«i,i", """"" 

"'''' "'nlk "ill .JI"WlIIj; "" ... "' ,""i<c;< ~ """,r" rrom. '''<U<<>'Y Ii",,,,,,. Mo>I" ", .. ie.::< 

", .. Id .... k,J.ru""" .... ,," ,,·h .. mu,1e ,,, pI.y ~ .... ,J. in "..fI. vn ,l>< p"bl~h,,J ... ,,, uf 

p'''i",I .. , .. ,,>\;', ,nd 'hcr_uld '''' 10,,0."" h<,~I>j"" ~r.n ,rtir",;.J "'Y.hy f .. ~ .. , .. ,I"" 

.II n'",", ''Gu,lIy, Curr,ij;lu O"'''''f> ",,,uld ho WI. '" odlu].! r ... '" """~ ,holr pro"IOflorui 

n,,,:.!. ..,d, If I""'" okrir<. po"',,!..' ,cd"",J prici"~ r",. IIII<l<'>mm<rrw """1< ..... i<1:o """h .. 

Mn-p"'r., <,,11'1;< ,.dkr , ... 10,,,. " """"at< f", schcOul. fur """"",,mm<tclol mwk....,.1ca 
210 

,""uld .I~,w«w""""" ,o""")n,,. ,,, b .. ".fi, &,,", """..",,,,.,,..-d>l h",ad",,,, ,.hll • 

.Il1,""I"\; "",,)"~ , ~ .. "". 'h ohuin f.al,.o1'WI1« • .d .. (tum «""""rdal muM, ,..,"";ceo. 

Cu"'n<l~. S.",odEod.",,!;< .If'" m"n,,'. 0 d .. ,""", or >II "",,1<1 ,,,,,,dinl;> .tod f ,11<" «.rt~punJ;n& WP1>w>' h.~d",. Thry «ouIJ "",nd ,h" d>L>.M..., ,0 iocl ...... ><1""'" 

"2J"""Y ",,,'t. Cel'l"'it:h' 0"'''''" mU" ..... Jy idct1t1fy 11><.;, "~,,od l«utdinp!\l 

So.0,.n1 •• I .... !;<.~, d~1 .... uIJ .d,,, , ... ,r, s..,.,,,,m.d""j;",,r,lo<" ~,,(.,,<J "'1.1'1 , .... 

TIl< lih".r)" "f VI"!;""> '1I<",liI m.inLti. on "1"'" v< i~n of ,11;, <l",,'-.. , •• Iu.hl< 

l",bHc '''''''"., J .. , ... Il< llb,,,y of O'"V= mal.", .. u«;"1 d". on puloli.h<d .....nc. 

,..<h .... Id ••• m!>:., ""J ,u"I«'. i, """'<I ""p",d .« Id"Vicc. ", .\!t" "m"" '''''',ml.';"n on ...... nd "'COIJi"l;>- Ind«d. on .o,oo ..... i •• J" •• »< of ... "nd r«u,dinj:> ",~,IJ !.. .n 

",,,,",o,,,'inIQ,,,,,,don """'",:< IQ, "',""'_ro, 0"< ",old ""i", Im"l.~","h., .. d''''''''m 

mJgi1' ..... ~ n!",o d,,,h.,,,,,,,,h ... ,hi,." """" • .d,~dol '"' .... u.- 10, <"",,,"" .... "'Pyrij;h, I>Wn<t>, ""d n,"", .,'''''''c, F.>f ;, .. ""',, •• ><Nl<"< ,,,,,Id ""p .... d ,~" d.,,!>*,< '" 

.U .. , ......... '0 l.lI; Ill",,'" wi'" .''YW0rJ, 1<1"""'."';'< ~("' .. ",,,,,....J 11.11' lItiI......- ,b.o 

find m~.i< "i"i'q; Ie . «<",in b~''''''.y<a" loond.,. ,ub,...." 

T" b,." U.S.·I>l...J I",,, ... ""ia,,,,,',,,,, CQI1lp«I'i •• _rlJwid".k< U.s'&V-"mm<n' 

,n".,ld r'"''''''" mh 'f'''''' in' ..... '~,,,'" y. VI,,\:""" .J .... W Jir<<< ,I", LiNolJ.,r 

c..n~'''''. ,he Offi,~ of' ,he Unl",.! S,.,.. T r. d<: R<p''''''' ''''V< lUST1\! . .Iud ,f,. 

1.,.11<0<, .... r"'l'<rty Enfo .... "',", Ooonli.".." II> ,.bl~h ~n In' ....... "'" f""'"",'Q, k {" 

.. ",,,d ._.du.gwprf11<" ~ un ,h"~>f<m,,,,,ioncd nl<><kL lin ,,,,,,,,,,,,,,";>1 

"",,,'om,,,,, ""uld lid" ,11>,,1< <It .. CQprril;lu Mid"", "",I". f.iI romp<nwlon 

i""'m'I,,, ... lIyand .lIuw wd!a.« .. '" brwIla., gk>l>oIly .. ,1<1""" f<", f ropyrig/l' 

Inf'inil'"m<nL In f.<t. d'nI<nf< of""';.!"" u< aI,....t)' «Inurncd In ,no IRFA. s.,,""n 

..... 0" of Ill< Iq;"''''''' ~l> fi,. d,«,,,,,,"'. <of. "-.;I<>1>aI mwk ,~..-cl.",h»e- <I"" ""lliJ 

"ndude . 1I1mo ... n '" <"I'),<ltn'c.:! .",de.l """lb .• he w,I,«> of ,II< """k. ,ho 1>Wn ..... f 

.1", ri~\Jt,. lh«n<;'y "" r..,h.olf...r ,t.,1< ...... n<f' ",'I» = li«"" .""" tigh" on .. <crti"'?" 

by"'«'"u'Y N>io, 'M al l k",,"n .. ",,,d ,"",dl" ~ <10., .. -" 

CONCLUSION 

C<tnj;r<» .Muld ... "k '" mod,mi, .. ,I>.: mu,ic "')'a11J 'Y""" ", """Oc"" r,i. "'r,ll}' 

'l",,'m ,Iu\ ~"l<"<,,ml""i,;"n ... d 1" •• • .. IIon_ Unfvnun.«ly "'" IRFA ~ __ Iokv, 

d,], p"1. I.,,<.od i, "",.dy","";'''''' on< b,<>It .. , 'J'>I<m IQ, "",,,10« ."d "'I"'" d,. 

hi<tlIlJ of "'\"iO <"I'r'itll, b ... '" gi'"'" ""f,;, ~'LOI"S< 1<, "no "~"P~' ,I>.: «p<, ..... ,f 

_the,. HQ""""". iJU<I<>t in ,1« IRFA a:I'" 0.mt:"'" the <1\'1'<"\"011}' \Q "fu,," ,II< 

h",w, ",,,.k.,,,,,oIl}' ')"<m...d hl« ~ "". , .. "fin'-""n i •• iwm".ic .,Id 

I''''od="o, ;"J.,,,i<> 
211 

ENDNOTES 

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213 

Music Creators North America 

European Composer and Songwriter Alliance 

Honorable Bob Goodlatte 

Chairman of the Subcommittee on 

Songwriters Guild of America. Inc. 

5120 Virginia Way, Suite C22 

Brentwood, TN 37027 

(615) 742 9945 

Intellectual Property, Competition, and the Internet 

House Committee on the Judiciary 

2240 Rayburn House Office Building 

Washington, DC 20515 

Honorable Mel Watt 

Ranking Member of the Subcommittee on 

Intellectual Property, Competition, and the Internet 

House Committee on the Judiciary 

2304 Rayburn House Office Building 

Washington, DC 20515 

Re: November 2012 Music Licensing Reform Hearing 

Dear Chairman Goodlatte and Ranking Member Watt: 

November 19, 2012 

We are writing on behalf the Songwriters Guild of America, Inc. (SGA), the Music Creators North America 

alliance (MCNA), and the European Composer and Songwriter Alliance (ECSA), whom together represent 

tens of thousands of American songwriters, lyricists and composers and their international colleagues, 

collectively referred to in this letter as "music creators." While we write in part to express our 

opposition to the introduction of H.R. 6480 (the "Internet Radio Fairness Act of 2012"), we also 

respectfully take this opportunity to comment upon several other issues of importance to the music 

creator community as Congress begins to explore the issues surrounding music licensing, particularly in 

the wake of the introduction of this legislation. 

As you are aware, issues involving the music industry are complicated, in part because there are two 

separate and distinct copyrights involved in music. The first copyright is for the underlying musical 

composition authored by one or more music creators. The second copyright is for any recording of that 

musical work by a recording artist and his or her record label, commonly known as the "sound 

recording" copyright. Sometimes, there is a tendency to think that authors of these separate and 

distinct copyrights have identical interests. But often, the interests of these two groups do not coincide, 

and the rights of music creators such as songwriters, composers and lyricists must be considered quite 

aoart from those of recording artists. 
214 

SGA/MCNA/ECSA 

Page Two 

The introduction of H.R. 6480 has sparked a vigorous debate over the fairness of various rate standards 

used to set royalties for sound recordings under Section 114 of the Copyright Act. Internet radio 

broadcasters and numerous other new services pay under a "willing buyer/willing seller" standard, 

which generally (barring various anomalies such as corporate vertical integration) provides marketbased compensation to recording artists and labels for their sound recording copyright. Satellite radio, 

on the other hand, pays under the so·called 801(b) standard, the result of which is a far lower level of 

compensation to artists and labels due to the factors that must be considered under this rate standard. 

Various other portions of the U.S. Copyright Act are also unfortunately subject to the 801(b) standard, 

including mechanical royalties for music creators under 17 U.s.c.§ 115 ("Section 115"). 

As Congress examines potential changes to these royalty rate standards applicable to sound recordings, 

it is our firm conviction that songwriters and other music creators should no longer be subjected to the 

more onerous 801(b) standard for purposes of mechanical licensing under Section 115. This rate 

formula grossly underpays music creators for their creations, and it should be changed to the willing 

buyer/willing seller standard. 

In making their case that labels and recording artists should be compensated under the willing 

buyer/willing seller standard for their sound recording copyright, the interested parties have noted that 

the 801(b) standard is a "below market, government mandated subsidy." As we make the argument 

that recording artists and labels should enjoy the more generous willing buyer/willing seller standard, 

the same should be applied for music creators under Section 115. 

Quite significantly, what has also been lost in the discussion about H.R. 6480 is the astonishingly low 

level of royalties currently being paid to songwriters, composers and lyricists by internet radio providers 

like Pandora. In fact, Pandora pays only 4% of its revenue to music creators (who often must split such 

royalties with music publishers), while it pays nearly 50% of its revenue to labels and recording artists. 

Put another way, for every dollar paid in music royalties by internet radio, only 8C of it is going to music 

creators and publishers, while 92C is paid to record labels and recording artists. That is a ratio of more 

than twelve to one against music creators, representing an outrageous and indefensible disparity. To 

make matters worse, Pandora has just recently sued ASCAP to further reduce the already nominal 

amount that Pandora pays to music creators and publishers, threatening to make an already untenable 

situation worse. Thus, we are endeavoring with our colleagues to develop proposals that we 

respectfully suggest can be considered, at the appropriate time, as separate legislative initiatives to 

address these grossly unfair situations. 

Before closing, we would also like to join with our PRO colleagues in pointing out that while the 

lion's share of H.R. 6480 is focused on altering the standard for rate-setting for the digital transmission 
215 

SGA/MCNA/ECSA 

Page Three 

of sound recordings -- so as to achieve a lower rate-- the bill contains a number of additional provisions 

that are so broad that they might have unforeseen, negative consequences on the business practices of 

PROs and the musical works the PROs license. Our concerns with each of these provisions, similarly 

expressed in a separate communication to you by the PROs, are as follows: 

H.R. 6480 would prohibit the use of collective licenses as benchmarks in Copyright Royalty 

Board rate proceedings, by only permitting the introduction of agreements with a licensor that does not 

possess market power resulting from the aggregation of copyrights, either by a licensing collective or 

individual owner. See H.R. 6480, Sec. 3(a)(3)(B) (definition of "Competitive market circumstances," and 

Sec. 3(a)(1)(B) and Sec. 3(a)(2)(A)(II)(placing burden of proof of competitive market circumstances on 

the copyright owners). While this provision would not directly impact PRO rate court proceedings, the 

language could be perceived to treat as inherently suspect the model of collective licensing, a licensing 

method that the United States Supreme Court, in the CBS case, recognized as an efficient means of 

providing blanket access to a wide-ranging musical repertoire. The suggestion, implicit in this bill, is 

that collective licenses (which often represent the product of negotiations between rights organizations 

and sophisticated and well-funded business conglomerates) are inherently untrustworthy instruments 

of market power. Such a suggestion is unfounded and would preclude the Copyright Royalty Board from 

even considering (and, in its discretion, giving the weight it chooses) to any industry-wide collective 

voluntarily negotiated license. 

H.R. 6480 prohibits owners of sound recordings, or their agents, from taking any action that 

would "prohibit, interfere with, or impede direct licensing by copyright owners of sound recordings." 

This language, particularly with its prohibition against "impeding" direct licensing, is both unduly broad 

and vague. 

H.R. 6480 calls for the establishment of a federal government-facilitated or established global 

music registry. This is wholly unnecessary, particularly in light of the ongoing initiative led and funded 

by the world's PROs, with the participation of music publishers and music users, to establish just such a 

registry. The contribution of the federal government's energies and resources are not needed, and 

Congress should allow the ongoing privately-driven initiative to proceed without government 

interference. 

In conclusion, we welcome the Committee's review of music licensing reform, beginning with H.R. 6480. 

We fear, however, that the Committee's focus is too narrow, and should take into account a more 

balanced view that includes the impact on those with interests in musical works, namely the music 

creators who form the bedrock of musical culture in the United States and throughout the world. 
216 

f 

SGA/MCNA/ECSA 

Page Four 

The past, piecemeal Congressional approach to music licensing has led to the serious under-valuation of 

music works in the U.S., to the great detriment of American and international music creators. This 

economic and cultural trend is counter to global practices and anathema to US interests, and must be 

corrected. As such, we look forward to working with your Committee in fashioning comprehensive 

solutions to the serious problems and issues outlined above, and thank you as always for your expertise 

and consideration. 

Sincerely, 

Rick Carnes, President 

SGA, Co-Chair, MCNA 

Eddie Schwartz, President 

Songwriters Association of 

Canada, Co-Chair, MCNA 

ECSA Members 

http://www.composer<llliance.arg/<lrticie.ec.6.meMbers&links.html 

Music Creators North America members 

Songwriters Guild of America 

Songwriters Guild of America Foundation 

Songwriters Association of Canada 

La Societe professionnelle des auteurs et des compositeurs du Quebec 

Screen Composers Guild of Canada 

AlfonsKarabuda, Chair 

ECSA 
217 

Honorable Bob Goodlatte 

Chairman of the Subcommittee on 

Intellectual Property, Competition, and the 

Internet 

House Committee on the Judiciary 

2240 Rayburn House Office Building 

Washington, DC 20515 

November 19. 2012 

Honorable Mel Watt 

Ranking Member of the Subcommittee on 

Intellectual Property, Competition, and the 

Internet 

House Conuuittee on the Judiciary 

2304 Rayburn House Office Building 

Washington, DC 20515 

Re: November 2012 Music Licensing Reform Hearing 

Dear Chairman Goodlatte and Ranking Member Watt: 

We are writing on behalf of the American Society of Composers, Authors and Publishers 

CAS CAP"), Broadcast Music, hlC. ('"BMI") and SESAC, the three American performing rights 

organizations (collectively, the "PROs") and the Nashville Songwriters Association International 

(NSAl), representing the public performing right in musical works of America's songwriters. 

composers and music publishers. We understand that your Committee intends to hold a hearing 

focused on the --hlternet Radio Fairness Act of 20 12,-' H.R. 6480 ('"IRF A',), and in that regard we must 

voice our concerns regarding both the purported rationale behind IRF A and several of its key 

provisions. On a more global basis, the narrow focus ofTRFA completely ignores a much greater 

problem in the online music licensing world: the undervaluation of the public performing right in 

musical works. This undervaluation of the public performing right mns contrary to global practices 

which often yield two times the fees generated by US license rates or more. when compared to 

equivalent economies, and represents a trend that is harmful to both America's music creators and the 

larger economy. Any Congressional examination of online music licensing issues needs to address 

this serious issue to ensure that the interests of writers and publishers - the very foundation fueling the 

music industry - are not further deteriorated. 

Background 

Before we address the substance of our thoughts and concerns. it would be usefiil to 

distinguish the separate and distinct copyrights that benefit different music rights owners, and which, 

as a group, are differentially impacted by H.R. 6480. To illustrate this distinction, consider the classic 

song, "Baby I Need Your Loving." Most people know the song through the Four Tops' recording of 

the work However, the song itself - the words and music - were written by the songwriting team of 

Eddie Holland. Lamont Dozier and Brian Holland (known professionally as "Holland-DozierHolland"). Indeed, many hit songwriters focus on the craft of songwriting. never stepping on a stage. 

As PROs, we represent songwriters, composers and music publishers who create and own the 

underlying musical works. In the case of "Baby I Need Your Loving," the performing right 

organization representing the writer and publisher of the song (in the case of this song. BMI) licenses 

the public performance of the work - the performance of the Holland-Dozier-Holland-composed song 
218 

L.:Uer [0 Hon. Goodlatt.: and Hon. Vll:ltt, NO\'L~l1bL'T 19,2011. page 2 

(no matter who performs it) on radio. on television, on cable, on the internet, and in bars. restaurants 

and clubs, among many other places.' 

By contrast, Motown Records. the owner of the specific Four Tops sound recording of "'Baby 

I Need Your Loving," licenses the public performance of the sound recording by digital transmission 

on a variety of online digital platforms through SoundExchange (or directly, ifthey choose to do so). 

For such performances of the sound recording, the owners of the sound recording and the performing 

artists-- but not the separate musical work's writers (here, Holland-Dozier-Holland) or publishers-- are 

compensated through this type of license. 

Or consider the eponymous theme to the new James Bond movie, ""SkyfaIL" The composition 

was written and performed by the well known British pop star, '"Adele" (formally, Adele Laurie Blue 

Adkins) and co-written by Paul Richard Epworth, in this case an AS CAP writer. Mr. Epworth is not a 

performer, but he is a well-known music writer and producer, and a top Grarnmy winner. No matter 

whether Adele performs '"SkyfaIL" or some other performer goes on to perform it, as writers, Adele 

and Paul Richard Epworth, and their associated publishers, have the right to be compensated for the 

public performance of their musical work through licenses issued by their aftiliated PROs (or directly 

if they choose to do so). Again, by contrast the owners of the sound recording of "'Skyfall" would in 

the U.S. license the public performance of the sound recording by digital transmission through 

SoundExchange (or directly. if they choose to do so), and compensation would ±low as mentioned in 

the paragraph above. 

It is important to keep these different rights in mind; while there may be a tendency to 

conclude that the interests of these separate rights holders would be identicaL that is not the case. 

The current bill under consideration, H.R. 6480, demonstrates the potential divergent interests 

as well as any example. Pandora, the online music service provider and one of the chief proponents of 

this bilL seeks to substantially lower the fees paid to SoundExchange for the digital transmission of 

sound recordings. However, any discussion of rate standards needs to address as well the remarkable 

disparity in license fees paid by web casters to songwriters and publishers for the use of the underlying 

musical works (e.g __ the compositions of Holland-Dozier-Holland. and Adele and Paul Richard 

Epworth, respectively) that are incorporated into the sound recordings performed (e.g., the Four Tops 

and Adele, respectively). 

To further illustrate this point: Pandora's 2012 annual report stated that it paid 49.7% of its 

revenue in royalties to SoundExchange, and 4.1 % of its revenue in royalties to the US PROs, namely, 

ASCAP. SESAC, and BML In other words. from the total pool of monies paid for the performance of 

music and sound recordings, almost 92% of the money paid by internet radio ±lows to record labels 

and performing artists through SoundExchange, and only 8% of it is paid to songwriters and 

publishers. Another way to view this example is that the owners of the sound recording and the 

recording artists (e.g __ the Four Tops and Adele, as performers, and their record labels) receive $92 out 

of every $100 in total music royalties paid by internet radio providers, with 50% of this $92 in sound 

recording fees going to the labels and 50% to the perfonners. 2 The individual songwriters and 

publishers (e.g. Holland-Dozier-Holland. and Adele and Paul Richard Epworth as writers and their 

publishers). through the PROs, receive only a small fraction -- $8 -- of the total $100 paid by Pandora 

for its performance of music, with 50% of that $8 going to the writers and 50% to the publishers under 

normal US PRO distribution mles. This almost I2-to-I disparity in SoundExchange and PRO 

1 The separate consent decrees with the United States that govern the business practices ofEMI and AS CAP 

eaeh provide for a rate court through which the separate PROs and their music-using lieensees ean seek the 

detemunation of a reasonable license fee. 

2 To be precise, or the 50% Lo perronners, 5% is spliL beLwecnnon-fcaLured perronners (such as backgrOlllld 

singers and musicians), and the remailung 45% is paid to the featured recording artistes) on the sound recording. 

17 u.s.c. (g) 
219 

L.:Uer [0 Hon. Goodlatt.: and Hon. Vll:ltt, NO\'L~l1bL'T 19,2011. page 3 

payments is unprecedented in the global music marketplace. Around the world. the opposite occurs: 

the public performing right in the underlying music composition is paid at fur higher rates than the 

public performance right in the sound recording. In fact. the latter right is sometimes referred to as a 

"neighboring right." in recognition that rewarding the creators of the musical work -- when it is 

publicly performed -- is a central tenet: without the creation of the underlying musical work. there 

would be nothing to record. 

There are many reasons for this disparity, including (a) the mandatory nature of performing 

rights licenses as required by the BMf and ASCAP consent decrees: and, most critically, (b) the 

renlsal of our rate courts to even consider SoundExchange royalties (pursuant to Section 114(i) of the 

copyright law). These constraints impact even voluntarily-negotiated licenses between PROs and 

music users. We welcome the opportunity, at a future point in time, to explore these factors in greater 

detail. 

We believe as a general matter that copyright owners are entitled to fair market value rates. 

Accordingly. we support the willing buyer/willing seller standard in Section 114. However, this rate 

disparity illustrates our point that different rights holders are subject to disparate treatment. and 

identities an inequity that should be remedied by Congress after reviewing how this gross and 

anomalous disparity in remuneration received by these distinct sets of rights holders has evolved in the 

U.S. 

As a result, there is in the PROs' view a gross disparity between the fair market royalties paid 

to SoundExchange and the nominal license fees paid to songwriters. and the trend, as a consequence, 

has significantly diminished the value of the musical work copyright below what ought to be its tme, 

fair market value. 

Concerns regarding H.R. 6480 

While the lion's share of H.R. 6480 is focused on altering the standard for rate-setting for the 

digital transmission of sound recordings -- so as to achieve a lower rate -- the bill contains a number of 

additional provisions that are so broad that they might have unforeseen consequences on the business 

practices of PROs or to the musical works the PROs license. Our concerns with each of these 

provisions are as follows: 

H.R. 6480 would prohibit the use of collective licenses as benchmarks in Copyright 

Royalty Board rate proceedings, by only permitting the introduction of agreements with a 

licensor that does not possess "market power"' resulting from the aggregation of 

copyrights, either by a licensing collective or individual owner.l While this provision 

would not impact PRO rate court proceedings directly, the language could be perceived at 

treating as inherently suspect the model of collective licensing, a licensing method that the 

United States Supreme Court. in the CRS case, recognized as an efficient means of 

providing blanket access to a wide-ranging musical repertoire." The suggestion, implicit 

in this bill, is that collective Iiccnses (which oftcn represcnt the product of negotiations 

between rights organizations and sophisticated and well-nlllded business conglomerates) 

3 See H.R. 6-180. Scc. 3(a)(3)(B) (dcflnition of "Compctitivc markct circumstanccs." and Scc. 1(a)(I)(B) and 

Sec. 3(a)(2)(A)(II)(placing burden of proof of competitive market circumstances on the copyright owners). 

4 TIle Supreme Courl, in the same case, rejected the notion that blanket licenses were a per se \·iolation or the 

antitmst laws. Broadcast Music, inc. v. CBS, inc., 441 U.S. j (1979) ('"C13S'). 
220 

f 

Conclusion 

L.:Uer [0 Hon. Goodlatt.: and Hon. Vll:ltt, NO\'L~l1bL'T 19,2011. page -1-

are inherently untmstworthy instruments of market power. Such a suggestion is 

unfounded and would preclude the Copyright Royalty Board from even considering (and. 

in its discretion. giving the weight it chooses) to any industry-wide collective voluntarily 

negotiated license. 

H.R. 6480 prohibits owners of sound recordings. or their agents. from taking any action 

that would "prohibit, interfere with, or impede direct licensing by copyright owners of 

sound recordings." This language. particularly with its prohibition against "impeding" 

direct licensing, is both unduly broad and vague. 

H.R. 6480 calls for the establishment of a federal government-facilitated or established 

global music registry. This is wholly unnecessary, particularly in light of ongoing 

international database initiatives led and funded by the world's PROs, with the 

participation of music publishers and music users, to establish just such a registry. The 

contribution of the federal government's energies and resources are not needed, and 

Congress should allow the ongoing privately-driven initiative to proceed without 

government interference. 

In sum. the U.S. PROs welcome the Committee's review of music licensing reform, beginning 

with H.R. 6480, and in that regard, we have some specific concerns. identified above. However, we 

fear that the Committee's focus is too narrow, examining only one group with interests in the sound 

recordings of musical works, and not taking into account a more balanced view and the impact on 

other groups with interests in the musical works underlying these recordings -- those of America's 

music creators and publishers and our members. 

As demonstrated above, there arc significant disparities in remuneration for different rights, 

and an undervaluation of the public performing right in music works in the U.S. This result, counter 

to global practices, is harmful to America's music creators and impedes their ability to continue to 

enrich America's musical heritage and contribute to America's economy. PROs represent the creators 

of this most valuable cultural export, and any discussion of the music licensing landscape needs to 

include our perspective. 

We look forward to working with your Committee in this Congress and next. 

John LoFrumento 

Chief Executive Officer 

American Society of Composers. 

Authors and Publishers (ASCAP) 

One Lincoln Plaza 

New York. NY 10023 

Pat Collins 

President & Chief Operating Officer 

SESAC, Inc. 

55 Music Square East 

Nashville, TN 37203 

Del Bryant 

President & Chief Executive Officer 

Broadcast Music, Inc. (BMI) 

7 World Trade Center 

250 Greenwich Street 

New York, NY 10007-0030 

Barton Herbison 

Executive Director 

Nashville Songwriters Association 

International (NSAI) 

1710 Roy Acuff Place 

Nashville, TN 37203 

cc: Members of the Subcommittee on Intellectual Property, Competition. and the Internet. 

Congressional House Committee on the Judiciary 
221 

,,,..,. s_.'<w ....... I.i, 

!I~ c;_, 

•· .... · .... "JI,Ih<,.tI/II,'w 

-~-,-, 

The Honomble Jllson Charfelz 

U.S. lloU5cofRepn:$e.nlalivcs 

1032 Longwonh HOB 

WilShington. DC 20515 

Dear CongressmllJl Chaffetz: 

TH E RECORDING ACADEMY" 

GRAMMYSON TliE HIll.' 

ArNoo.cf ~ If.oJsm RflAllOi'IS 

Oeloberl.2012 

On behalf of The Recordi ng Academ:l. the trade association rcp~ntin8 musicians, singers, 

songwriters lind studio professionals, I am contflciingyoll 10 express our Siron!! opposilion to 

I-l.R. 6480, the " Internet Radio Fairness Act," ..... hich you introduced on Scptembcr21. and tlte 

companion bill introduced in the Senate by Senator Ron Wyden (So 36(9). 

On September 25. in an interview di5\;ussing the bill with Radiol"", you SUIted lhal ists are 

thrllled aboul this ftnd il would make:l lot of sense for artists On all sides of the etjWltiol1 ." I 

~sure you this is not the CIlS\:. Unfon:unntt'ly. for artists lind Ihe Olhcr individWlls who create 

music, li.R. 6480 is morc "chilling" tban "thrilling," In faCI. tile bill would only add insult 10 

injury for music crealors. The insult is Ihal lite bill claims io creaie fairness but fnlls 111 address 

the real inequity Ihlll whilc Internet radio services properly pay crealors, tCl"llostrial radio 

broodcasters pay nothing. The injury is that the bill would severely eu! ~ royplties that digital 

music providers pay to Cl"ClllOrs tQ a ~~low m:u-ket leve l, undermining ~iT abililY to make a 

living from !heir hard work. 

Achieving royalty ratc parit~ for aU Ill.dio platforms is an imponant goal that rcquire5 Congress' 

onenlion, but l"I'al parity must include two critical clements. First, real rd le parity mlllli include II 

royalty ralC thai reflects the rair mllrkt:1 value oflhe music thai radio services usc 10 build their 

businesses, not pushing all services dc.wn to B ~landard b~t ~!llounts 10 0 go~rrunCnt-mandaled, 

~Iow maricel subsidy. S~cond. real mte parity must clo!!<l Ihe loophole Ihat 8llow~ broadcast 

r3dio 10 reap billions of dollo!"li in adv,:nising revenue without compensating the music crea tors 

they rely on. Radio broadcMters are lhe only business in America that can usc: WHIther's 

intellectual property without permissiun or compensation. Internet, SIItel lilc and cable radio aU 

compensate performers. Fairness in mdio ",ill only be rcalii<Cd whcn Congress closes the 

terrestrialllldio loophole. 
222 

f 

I urge you to withdraw the "Internet Radio Fairness Act" and work "",jth the artist community to 

craft a legislative solution that will provide genuine parity for everyone. We stand ready 10 work 

with you to provide the music creators' vie·wpoint. 

;; ~-. 

Sincel&relY, . 

~ 

Daryl P. Fliedman 

Chief Advocacy & Industry Relations Officer 

The Recording Academy 

ce; 

U.S. House of Representatives 

U.S. Senate 
223 

Novembe'2,20U 

The H""O/~b ~ Lorna, S. Smith 

Ch."m.~ 

CommiUl'e 011 ,he jud«iorv 

11.5. Ho~s~ of Re~~nta!ive, 

Room lI!ll1 ~.ybu," HOB 

W.,hlnllton. D.C 20515 

Tr... licnorable. Bob Good all~ 

Chairman. 5ubtommll\"" on 

I(HeUmu" Propefty, Comp~,ltlon 0.-.1 

Iheln'~r"'" 

Commluee 0/\ , ... Juditi';HV 

U.s. Ho .... 01 Rep' .... n'~I0"". 

Room 0·]5l R'vburn HOI! 

Wa.hin8ton. D.C. 10515 

Th,. Honorable John Cony~, .. Jr. 

P..1nk'ns Membe, 

CommlneeO<1 1M ~d,d;.fV 

u.s. Ho~s~ of !\ep~~nt.'M .. 

Room 2142 P..1ybu,n HOB 

W .. hfngton.O.c. lOSIS 

The Honllf.b~ Mellll/l Watt 

Ran~inB Mem"",. Subcc .... m,uee on 

Intelleuual P'<>\lCf1¥. Com""tilOO<1 and 

,he Inle,,,,,, 

Commiuee"" IIIe Judici.of'/ 

U.S. foIo .... ~o Rep'e~nl.I"' .. 

R""m 0·351 R.~lrum HOD 

W3,hlng'on. D.C. 10515 

RE : NAACPOPflOSITION TOTHE IHTERN£T RADIO FAIRNESS ACT 

~., o..irman Smith, Ranking Mambe, COnven, Ch a.,man Goodl.lle •• ,\11 Ranking Member 

Wall. 

On behall 01 the NAACP, our not.,n·, """"" .. ,~, and most w'i<lely 'ecognl'~ I'''''''''''' ba~d ti.,1 ~aht5 oraani<alion.1 ..,ite ,oappo", ' '''' "Inte'''''' Radle Fairness Act" MFA). (H.R. 

~80 I s. 16(9) .• billlh'i! would u nfa,rIy deprive '''iOl, and pe.fo,mer< 01 fa .. pav for their 

ha,d WOf'. A.\ a n O/Ianl,allon wt,ICh h ... 10' mo<. Ih;rn ID] ve~, .. fough, 10f economIC ju"(c~ 

lo<.n "m"lie.n •. th" iegj>lal.,n ". tie.,.., .ntit~"uIIO tn.. wo",01 I"'" NAACP. Quil" fran~ly. 

1M fFRA bill fai l.tn.. boil'" lest of I..:onomio; falrnoes> and d-Is.criminate ~ ... a'~I.lnKI!n;>nd 

mu§/<""' by .ta.~lng ,he compt!fI:;aHon lilev receive wilen thel. WOIt i'I pi.""d Oller docllal 

anlinoe ,adio. 

Fal, and ~ck'q u .. ncompt!ns'llon fOf a days wo" il a lu!\dllmen!. icMI and /abOt ritllt II was 

I ... foundotkln af M'f1i~ lu!Mr K:n& Jr:. 1'"", People, C.mpall~ .nd II', 1M ~a..,n he ..... In 

Memplli ... 'ppor1;nl,he <anit.I .... ' w<>.ke" In "'~" 196! wh"" "" .... s mu.de,ed. Economoc 

)oWce was alway. <emrai to Dr. ~;"KS' worl<. uwell is 10 'he mluionol the NMCf' lInee OU' 

Iocepl-on. 

Urode,wn-ent law,.11 webc;oSl"n; pay. ,ale.." by,~ Copy'lE:M RUV.1tv600 ,d ICR8) ",co'cli lll 

10. " .. iIH". b"Ye" .. il~1II ",lie,' ~ndlo rd . That 10 to lOIy,'hey pov I"" m.,ke! ... 1"" for'he use 

of -'<lund recordllll" .nd ,Inl." a nd mu ..... '" I,e tompen .. '~ occordlngly. 
224 

f 

More than eighteen hundred Internet Radio stations currently pay performance royalties 

according to this standard, which is more than.a decade old. Yet now, Internet some radio 

giants want to change the law so they can pay.a lower, below-market rate enjoyed by just three 

digital services that were exempted from the CRB standard (or "grandfathered") when it was 

established in the 1990s. Thus, the IRFA bill would mandate that more than eighteen hundred 

Internet Radio stations pay recording artists and musicians far less than their recordings are 

worth, just because a very few, older, digital services do. This would start a race to the bottom 

in performer's compensation, violating the founding principle of America's labor movement: a 

fair day's work deserves a fair day's pay. 

Many of the performers who would be affected by this lower compensation rate are the now 

elderly singers and musicians from the Motown era who received little pay for their original 

work and are dependent on this modest performance royalty that would be eviscerated under 

IFRA. These musical heroes may not have written the songs we love, but they brought them to 

life with their performances and deserve fair pay when their hard work is utilized. 

Accordingly, I urge you again to oppose the Internet Radio Fairness Act and instead to work 

with all stakeholders on a new bill to protect the labor and economic rights of artists and 

performers and put all forms of commercial broadcast performance on a sound, fair and longterm healthy financial footing 

Thank you for your attention to the concerns of the NAACP. If I can be of any further assistance 

to you, or if you would like any further elaboration on the NAACP position, please do not 

hesitate to contact me at (202) 463-2940. I look forward to working with you on this matter. 

Sincerely, 

Hilary o. Shelton 

Director, NAACP Washington Bureau & 

Senior Vice President for Advocacy and Policy 
225 

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October 1, 2012 

fhe I'onorable Sob GOlldlatte, ellair 

SUbcoOlmil1ee on IllIeliectualProperty, Competition, and the !rl!@rnet 

House COmmitte-. on the Judldary 

IH52 Il-.... bu'n House OffICe Buildi", 

Wnhiflllon, DC 20515 

Tile t+oOOrlibie Mel W~tt..Itlr>lli1lJl Membtf 

5ubcomminee on Intelle.:t~1 Properly, Competition, ~nd ttl!" h1telTll't 

Hou§t' CommUtee on tile Judkiary 

8·351 RaybUfn Hou5l! Office 8ulldinR 

WashinRtr.lf\, DC 20S15 

Tile HOfIOI'lIb~ Palr k k le.hy, O1,lr 

224 Dirksen Stornlle Ofll,c~ Buildln! 

SenaTe (ommlll« on the Jud~1V 

WnhlflBlon. DC 20515 

The Honorable ChuckGran~y. Rankine Member 

152 Oir1<sen I(oll~e Offlc@ 8u ding 

Sen~te (ommlttee on Ih" Jud jclary 

Washington, OC 20515 

RE; H.R. 6480/S. 3609 ~"The Inle""et Rliflo FalmHs Bill" ) 

I am wrlti .. on behalf of lhe Americin AnocYlion of lndepefM!tnl M...sic ~·A2IM1 to n pressOUl' 

tl\Ou8tll~ 'ea~fd"l. H.R. 6480/S. 16091-rhe iflTe rneT Radio Fairness Sm") ~nd Ihe poTential effects on 

independent ".uslc.Qbels.Old lheir .. rtisu. 

Independent la belS and artists care dl!f!jl''Y abQullhe HfOWth of Inlernet radio. Pandora and services Uke 

il have enabled many Independent labeJs,md art,.ts 10 oblll,n fidlo alrpl.v, bulid their audlenc!! and 

receive (Iuclal compenuUon. AI bnndCOISt IFM/AM) rildio, 'ode-pendent music: Is Ipproxim~tely l~ to 

12% of OIIerlill rlIdlO $pin~ritff1r&~ Uem.t5 Internet rlIdiQ where appro~,m~lely one·t jrd of music. 

strurne-d h nde-pend~1 mus«. As. r~MfIL ~u cannot fond SlfOfllef supporters ollnternel "dio 

broidcasl~I' thJn Illey "a~ in t/>elndel)l'~t commumty_ II;' importinl to lndependenlS thaI 

Inl~rnel ""'10 conllnueli 10 . ,OW and bt<:ome. larger and sust<liNble ~rt of lhe radio lindsap" 10 

provide- ",eeSli 10 ill crUto~. 

Slmultane-ou~ly, we ilre ooncerned ~boul. some of the prov,siom 1n H.R. 6480/S. )609 and we feel 

wOllJlly Ihiltthls bill does nOI represent ,n Ipproprlale solution. At lhe OUtsel, thl! bill purportS 10 

cre~te f,if1~sS Ind panlY in compensatj,)n r~ e SI,)ndards .monC piatfornts, yel aj!~ w ~ddren 11 gliri", 

;neCjllity in current hlw; the lilnsular uefnption of over·ttoe·airbra.dcil51 te rrestrial radio '10m payfnl it 
228 

f 

perform<lnce right to performers and music labels for playing their songs, while digital radio does 

compensate the creators of sound recordings. This disparity not only deprives music creators of fair 

compensation but also creates an unlevel playing field between music platforms. Any bill that aspires to 

create fairness and parity must create an FM/AM broadcast radio terrestrial performance right royalty 

to be paid to artists and labels. The current level of disparity between the royalty rates paid by Internet 

radio at one end ofthe spectrum and over-the-air broadcast terrestrial radio -which pays nothing to 

performing artists and labels-at the other end of the spectrum is an obvious problem and correcting 

that inequity should be the first legislative step towards creating "radio fairness". 

In addition to this important omission, instead of creating fairness for Internet platforms, the bill starts a 

race to the bottom by drastically reducing the rate paid for many Internet radio payments to artists and 

record labels to below the government mandated rate. Under current law, Internet radio broadcasters 

compensate labels and artists under the "willing buyer, willing seller" rate standard. As the term 

suggests, it is intended to approximate a fair market rate and is decided via input presented at the 

Copyright Royalty Board by all sides and then decided upon by this three judge panel insuring that 

individual negotiated direct [fcenses need not be negotiated between service and copyright owner (a 

situation that would enrich attorneys and favor major labels and superstar artists to the detriment of 

independent creators wishing to be fairly compensated for their contributions). The proposed legislation 

would change the standard to a far below market rate <lnd would require music labels and artists to take 

less than their work is worth, in order to subsidize Internet radio companies. We encourage Congress to 

work with all ofthe affected parties to develop a solution that enables Internet radio tp grow and 

become a larger and sustainable part of the radio landscape while also assuring that labels and 

mUSicians are fairly compensated for their extraordinary creative efforts whenever their music is 

performed on the radio. 

Music labels and artists have taken some hard hits in the last decade as we've had to adjust to a 

business model based fargely upon performance royalty revenues as consumer behaviors shift to 

consuming music via Internet radio a nd other mea ns in place of music purchasing. It should not be 

mistaken, however, that these revenue hits and consumer changes indicate a diminished importance in 

the power of music as a driver for services induding radio and Internet radio. Fair compensation should 

be the common sense rule whereas it applies to any service performing music to attract fans. H.R. 

6480/5. 3609 would add furtherto the financia I harm of musica I Inte lIectua I Prope rty creators trying to 

make a living, We urge you to reject misleading titles of "f<lirness" and claims of "parity" and oppose this 

bill. Please do not hesitate to contact us with any questions you may have about our position. 

Very truly yours, 

(2. .. Cbs), Q..~ 

Richard Bengloff 

President 

American Association of Independent Music ("A2IM") 

cc: Members, House and Senate Judiciary Committees 

American Association of Independent Music - 853 Broadway, Suite 1406, NY, NY 10003 - Ph 212 999 6113 - www.a2im.org 
229 

AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS 

Dear RepresentatiH': 

815 SIXTEENTH STREET, N.W 

WASH!NGTON, 0 C 20006 

LEGISLATIVE ALERT! 

Octnhc:r 19. 20 J 2 

RlCHARD L TRUM!<A 1)"ItS)I)IONT 

EUZABEll1 1-1, SHULER 

~'E:CRtIARY-' IIE .... SvHE'F< 

ARLENE HOLT BAKER 

!'-',FCU11\!E \/ICE' PRE~\[)ENT 

On behalforthc AFL-CIO. [urge yOU to oppose Il.R. 6480. the "Imernet Radio 

Fairness Act"' (JRFA). a bill that unfairly robs recording artists and 1l1usicians oCtheir fair 

pay in order to subsidize the profits of Internet radio companies like Pandora. I urge you 

110t to cosponsor this legislation and instead work with the singers and musician;:; 

represented by the AFL-CIO to nan a new bill that ,,,,ould end uccadc::. of discrimination in 

the radio industry. 

Under current 1a\\. all \vcbcasters pay a rate set by the Copyright Royalty Board 

(CRB) according to a "willing buyer. willing seHer" standard. That is to say. they pay the 

market value for the use of sound recordings. and singers and musicians are compensated 

accordingly 

More than eighteen hundred Internet Radio stations pay performance royalties 

according to this standard. which is more than a dccad~ old. Yet nO\\I.lnternct radio gicmts 

like Pandora want to change the law so they can pay a lower. belmv-market rate enjoyed 

b)' just three digital services that were exempted from the eRn standard "",hen it \vas 

established in the 1990~. If Congress were to change anything, it should end this 

exemption so these three services pay the market rate ~ not let all webcasters pay unfair. 

be1mv-market royalties. 

instead. the JRFA \,vouJd mandate that more than l':ighlccn hundred Internet Radio 

~!a!iom plly lTcClfding 3rti"ts and n1U":j~ians far less than their worth. lust 

h~l:~Hl~C three ~ligital services do. This 'would strut <1 racc 10 the boHum pnfofln.:rs· 

compensation, \,iolaling the fuunding principle of Amcrica''j labor movement: a faiT day's 

w{lrk def.cf\'~s a fair day's pay. 

1\1\treovt:r, webcastcrs do not Dl.'ed a government handout financed on the hacks of 

working musicians. In lad, \\'ebcasting is '-1 growing industry {hal many ~cc (lS the futw'r of 

rauio. Indl..tstr:-- leade!" tJandora recently cdc.bmted (I,ll IPO that rai:-;cd S~35 mil1il)!1 on th\..' 

flrsl day of trading. and is expected to make mon: th,m $fJ{)O million in rei-enUl'S nex1 ~'ear. 

~k~or .\T\1/Flvl radio C01l1panjc~ also ~ee opportunities in this space, anJ [lr~ t:re.::.tlin~ their 

l)\vll digital wehcasting ~.:rviL'es. As thi~ inJustT) gr(y\-\5, f1lu<;ic creatOrs dt':it'f\T to benet!!, 

uut ju~t cOl])Oratlons 
230 

f 

'1 hI;;'. Jeeper 11m"" in the TRF/\ i.s that it fails to c1os~ the d...:caJ~:'H)ld sp~dal jllkr~st 

loophnlc that exempts AMiFM radio staTions from paying any performance royalt~r 

wnatsoe\,e,T. Each yL'ar. lh~s(' radio cOJ1"lorations make billlon:'! in .'ld\ertising dollar,> by 

playing hit StHlgS v"irhout paying <1 and !llu"icians !hal pc>r!i.')nnc,j !lh)~~ 

songs, The L.S. is the only devt"inpt'J nation \\'orlJ aside hOIll d k,,< otht.:r,,,. lih: 

China. North Korea, and Iran 111..1.t does not [t'COg11lLt: d pertixnKUH.'e right (ilnd 

for o\\~l'-th~-air hroadcast::i. ;\ny legislation that se~k~ to ""-:\'d thL': playing nelJ" 

performanc\: 1 oyaWcs cunong radio broadcasters Jllu'>t tiTst close this J\.1ophok. 

For the above reasons, 1 mgc you not to cospnnsOi' lhe prllpos~d kgi,'1latiun ,lfld 

\york \\ith the AI .. ! -C!O tn WfilL' (l Dt.:\-\ bill that ,>,,-nuld cn:;ure that all radio p!atrorl1l~ laid), 

~ompcnsatc recording artists and mu~icians. 

Sil:""'llIY" < 

(/tll L··I William Smnucl. Director 

Governmt:nt Affairs Depanment 
231 

Th~ Honorable Patrick Leahy, 

Chairrruoo 

The HonoOible Chucl< Grassley. 

Ranking Mrnlbcr 

U.s. Senat"- Committe'e on !he 

Judicial)' 

224 Dirksen Senate Office Building 

W:u;hingwn. DC 205liO 

Dear Senator.; & Con,gres.sll'lffi: 

The HonOrllWe Bob Goodlatte, 

Chairman 

1be Honor.ible Mel W~tI 

Ranking Member 

U,S. HOlllie of Rtpresentl.Q'·es 

Subcommim:e on Ina:JlecnW 

pro~ny, Compc:cition and Intemet 

2138 Rayburn House Office Building 

Washington, DC 2051 5 

On behalf of Ameria,ns forT:u Reform, I write to you regarding The Internet 

Radio Fairness Act. This leghlation would repbce on~ cOJnpull;ol)' model for 

gm'emment price s~ning of copyrighted material .... 'd1 :mother. \Vhile the 

current so-oUed "will.ing buyn willing sdler" modd may attempt to mimic a 

free market negotiadcm by looking at frcc m:u-ket dcal5 u a benchmark, the 

$tlIndard in IRFA mO"ves in an ~n IIIOl"Se direction row2.Id~ forced lxlowm:lrket r.i!ti . Both ute existing;llld propo!otd mode!s pick wmnas and lo!en:, 

r.ithtr !hun allowing free m;lrkct ncgotilltions. 

The entire existing pcice_oontroUed =ng~ment is Wlfommare and unnece~sary. 

Instead, all parties, e.~~ writer.;, arililS, ra:ording companies. broadcasting 

companies and omen;, ~hould be allowed fO negotiate muuWly &grel'llble terms. 

Then:. is no way, ultinu.rdy, for a legi51aror ro decide what the fair rnar\,,",,t value 

of ~ product or service is. 111at is what the m;LTkel is for. 

We should mo\'e toward a market wh~re Ktting prices. forbidding acnOr\f on 

one side or the oilier, preventing m~ acceprance of p~ymem for one suvice. or 

another, or prohibitin,g collection o f compensation for the use of property a", 

tIun~ of th ... past. 

We bt:tievc !tr\lOgly b<>th Ul an open and free nw:kct, ~"d the ,;gllant rWtec.tion 

of property rightS. r ,;U'QrIgly urge you to move towamll marke! solution. When 

1M govCITlmenr sca the (Rrc for music, it is enacting price controls, in 
232 

f 

.A,M;ERICANS Page 2 of 2 

Jt"'pTAXREFORM 

opposition to what should be the agenda of a Congress that supports the market 

economy. Rates should be allowed to emerge according to supply and demand. 

Government should extract itself from this debate to allow an environment for 

negotiations to develop among broadcasters, record companies, artists, and 

other interested parties. 

The debate on petfo=ance rights is an interesting and important one. 

Ultimately, it should be made in the marketplace, not in House and Senate 

office buildings. I urge you to enact reforms that protect intellectual property, 

nurture the private sector and allow the free market to determine prices and 

compensarion for labor and intellectual property. 

Onward, 

-//?-

Grover G. Norquist 

cc: U.S. House Commiltee on the Judiciuty, U.S. Senate Committee on the 

Judiciary 
233 

. , . CIT1ZENS 

r.;, AGAlNSr ~ GoVERNMENT 

WASTE 

Tho",_. ".. Scbatl 

!'Iwllkt!, J'l"vc:m~r 16, 2012 

The 11onorable I'utrkk Lc~hy, Chairman 

The ~lonl)l'IIbl" ChllCk Grasslcy. Raokinll M~",Jx,r 

U.S. S~n3(e. Commiuee on tile JudiciI/')' 

22<4 Dirk.sen &1III!e Ortice Iluildinll 

Wulling!o", D,C. 20510 

Delli St'llBln~ and Con~ssmen, 

The otlo!1lbl~ [)nb GoodJauc. Clmirmnn 

The Il unol'llble Md Wall, Kink ing ~mbc1' 

U.S. ou~ of RI:'JIfCSC'fI(lI1i~es 

Subcommiuc.'C on Intellectual I'ruperty, 

CQlJlpetilion and Internet 

lIn Rayburn UOU5c. Offltc BUIlding 

WashinS\lm, D.C. 2OS15 

Oil behalf "flhe mol'l.' !han one mill inn member~:\lld ~upporters oflhe Countil fo. 

Ci1i.ttns AliainS! Vovemml!Jlt Waste (CCA(lW). I am .... rilingiQ YOII rc~ing OOncc:ms we have 

wilh H.R. 6480 DDd S. 1609. the Internet Rldi .. F.irness Att or20 12 

The ,,0101/1 oflm~~ll';ldio tIllS iIO.kkd 10 existin& diKil.lo1 satclllte and cable KtvlttS and 

provided new pJaifonm for liJleni!l1l1O music.lndudina mobile access. In this digital radio 

world, ownns.1III t'lUtOll of~')Pyri8hled mUlmal. including anisIJ and =onling ~OlUpanj", 

Ilre subjcct to compulllory Ikcns;nw. with raleS stt by the fIO~mt t. Due to ~ "b',·,uldfalhi:r 

"lauSll-,' SIlltUilc and <;lIbl" I'Ildio rutC! Q~atiIJ SCI under 8. 5landil1d d~vdOpW;n the I 970~ for 

lerdv;~;On ~;£I1al r<:ll'Ilnsmis!iQn thllt 1000f<.o; in old busi~ss modol! and l~chnology by prcvcnlink 

"dilif\lpli\m" of l<Slablished services. This resulu in bc1uw·m"kct rales and B !iUbsldy for thc5e 

en\/'Cnched JCrvicd. ntt~1 ntdio rll0:5 are SCI WIder a newer slalldard thou 'nUSI 'Qnsid~r 

man:tt~ benchmark5 to dnmnine what a "willing bu)'t'l" Wi)Uld negotiate with a willing 

scHer in lhe ItW'ketjllace" 10 Irrive It a fair mar\:ct V1111t for the product. 

RlI1m than providing paril)' by -wying the ""'oVI:f f~m.rkel based standard to ~r 

iI't'I'\'ite5, II R 6480 and S.)6(19 pro~ilk lhe: opposite: plitciR¥.n IWrvices under ~ oid !lllII\d3rd 

thaI forces below·mAritet r1t.tes cum:nt1y paid by the: tht« "p'a%ldfllhcred" kcs (Musie 

Choice. XMSiriuJ, and Musak.) The !'C5uiti5 to muve nearly 1,800 tjti~fi thaI , ,,rrcntly 

l>JlI'r!ltt undcr the: matktt-h8.'ICtl standard down co the bel()w.mlll"kel Standard, instead ofm()ving 

thc three grlllldr~ihe", d entities lip 10 Ihe marker·based standard. And the bill propo.o;eii a 111:"". 

politic.l, prt'lidc:ntia11y appointed boMII that will mnimi7.e the lobbying potential ofthc 

~lp;cm5 of the: govcnune'" ~lIb:;idy , 

lbc hetring JCheduJed by lhe Subconuniu« for November 29 is an CIICO\Iraging snlfllo I 

.... "Cded dcl)ale on refunns ,hat should enable thc:. remov,,1 of bamen 10 tI\lll'kd negotiation 

ljQl .... '''''')1 •• ";»,..''''-. N W 

SUj'. i07~ 

\VM~ ''' . DC l(Xll.I 

I'haoo 202~6 '.lOO 

Ilalo 2!I'Z-467~n} 

_,",c"I"'.(IOJ; 
234 

f 

between the owners and creators of copyrighted cOlltent ,md the digital radio services that use 

their works. While we agree with the basic premise that all services should be treated equally, it 

should be under market-based standards. It is imperative that Congress protect intellectual 

property rights, and allow the lree-market to work in pricing negotiations. 

Thank you for your consideration of CCAGW's comments on this important issue. 

Sincerely, 

1~j:~/ 
235 

November 26, 2012 

The Honorable Bob Goodlatte. Chairman 

The Honorable Mel Watt, Ranking Democratic Member 

Subcommittee on Intellectual Property. Competition and the Intelllet 

Committee on the Judiciary 

U.S. House of Representatives 

Washington, DC 20515 

Dear Chainnan Goodlatte and Ranking Member Watt 

On behalf ofthe Recording Industry Association of America (RIAA) I and its member companies, 

I am writing to bring your attention to proposed legislation that would stifle the development of new 

innovative digital music services, decrease competition in this vibrant marketplace, and completely upend 

an established rate-setting system in favor ofa shockingly one-sided process that rewards entrenched 

music services at the expense of ne,v business models and llUlSic creators 

'The Intelllet Radio Faillless Act" is anything but fair, discarding a market-based royalty ratesetting standard in favor of one that goes out of its way to disadvantage both new services and the artists 

who create the music. The standard proposed by lRFA includes a factor that would prevent the 

"disruption" of old teclmology and old business models. hl other words. it would "lock in" through 

subsidies the existing services. TI,e standard has also has been found by the administrative court to 

require below-market royalties to those who work to produce the music, and we estimate that artist 

royalties could be cut by more than 85%. If the govelllment is to insist that recording owners must 

license their music to these services, shouldn't the compulsory rate at least be market-based, and promote 

competition. new business models and new technology" 

The legislation claims to create parity in rate standards between music service platforms. We 

agree that parity is necessary. Market-based rates should apply to <ill services that use music. A race to 

the bottom that instead sets rates for music at below-market prices for all services will result in less 

music, less innovation, and fewer successful business models and services that can compete while serving 

both consumers and creators. And !me platfolln parity must address the most glaring inequity of all -

AM/FM radio. Commercial terrestrial radio can take artists' music without permission and without 

paying - the ultimate and complete "special interest" exemption. 

Consider Pandora, the company that is leading the charge for this unfair legislation. We have 

been very supportive of Pandora over the years. TI,e recording industry has helped Pandora grow from a 

I The RL-\.I\ is a trade group representing the u.s. recording indus"tr)!. Its members create, manufacture and/or distribute 

approXlmatcl:y 85% of alllcgiti11latc sound recordings produced and sold in the United States 
236 

f 

small start-up to a successful and popular online service. But Pandora - the service that claims it needs 

financial help from Congress - is now a pnblicly traded company with a valnation of $1.5 billion. It has 

enjoyed 99% year-over-year revenue growth and has amassed a listener base of 150 million people. The 

top five executives were paid $11.8 million in FY '12, not including founder Tim Westergren's salary or 

his exercised stock and options worth over $6 million in the tlrst half of 2012 alone - hardly the poster 

child of a company in need of a bailout or a govemment subsidy. Indeed, Pandora itself claims that its 

future is bright and it doesn't actually need royalty rate relief. 

Perhaps this discussion could be taken more seriously if it were the first time Congress was asked 

to intervene. The fact is that Pandora and other webeasters have repeatedly balked at paying fair rates. 

\\Inen rates were first set in 2002, webcasters engaged their listeners as their grassroots to get a 50% 

discount. They subsequently demanded a change to the rate-setting system. and supported changes they 

asked Congress to pass. Yet when the very Copyright Royalty Board that they fought to establish set 

new rates in 2007, webcasters -led by Pandora - balked again. Pandora mobilized its vast online user 

base to mount a massive PR campaign, which led to new legislation for negotiations on lower rates. 

Content owners granted webcasters a significant discount on market rates. and the settlement. Pandora's 

Westergren reported, provided the "certainty required for companies to develop more concrete business 

models .. , Yet here they are, a mere three years later, back again at your doorstep. 

Unfortunately, Pandora has failed to pursue the "more concrete business models" Mr. Westergren 

promised. The company simply has chosen not to aggressively monetize its service. As one investment 

analyst noted. "If Pandora ran several minutes of audio ads per hour (the way satellite radio and terrestrial 

radio do) versus just a few IS-second spots, the percentage of revenues paid out as royalties would be 

dramatically lower and would be more in line with satellite radio or cable TV." Of course, iI's just easier 

for Pandora to cut costs (i.e., cutting compensation to below-market rates for the creators ofthe music that 

drives its business) than it is to work on building revenue. 

At some point. Pandora must accept that finding a business model that can compete in the market 

is essential. The music industry has certainly adapted its business models over the years. Pandora must 

meet the same market demands. Cutting costs by refusing to properly pay creators of your core product is 

certainly not fair. Neither is it the right solution. If Pandora has a problem, it' s not a cost problem, it's a 

revenue problem that it alone should solve. 

It's time to tell Pandora enough is enough. As the company tells its own investors, there is a lot 

of upside. But it doesn't need to come at the expense of our country's talented creators. Please oppose 

"TI,e Intemet Radio Faimess Act." 

Sincerely, 

I 

Cary Shennan 

Chairman and CEO 
237 

October 22, 2012 

I

SAG -AFT RA 

ONE UNI ON '--

Re , H.R. 6480, the In emel Radio Fairness Act" 

Dear Represenlati~e : 

• 

On behalf of the 160,000 performers who are members of SAG·AFTRA, we urge you not to 

cosponsor H,R. 6480, the 'Inlernet Radio f airness Act: and to oppose the bill should it come 

to a vote. SAG-AFTRA il'lciudes Ihousar'lds of recording artists and background vocalists who 

rely on the digHal per/orroance royalty streams thiS legislation would decimate. 

Furthermore, of vital importance, H.R. 6480 completely ignores the worst and most 

longstanding injustice in the radio irldustry: the special inlereslloophole that allows terrestrial 

radio platforms to use sound recordings without paying any performance royalty to performers. 

This is grmsly IIMair to our members who earn their livings as recordir'lg artists ar'ld sir'lgers ar'ld 

wl10 deserve to be paid for the use 01 their creative wor~. 

Over a decade ago, COfl8re~s pas~ed federal legislation recognizir'lg a performar'lce right in 

sour'ld recordings Orl digital radio servia!s. This ~gislation establistled a ro~alt~ Ilcerlsing 

framework ttlat set performarlce royalty r.ate~ for sourld recordings based Orl a "willing buyer, 

willing seiler" or fair market value star'ldard. This sta rldard has allowed digital radio platforms 

to iflnova te arld grow arld tlas promoted arl artist's rigM to receive lair pay for ttle use of their 

sound recordings. TtlI.' legislatiofl wasn't ao uoqualified victory lor arlists; Coogress 

"grandfattlered" an exemption for three erltities already in existence, including ttle now 

merged XM and Sirius r.adio. Ttlese erllities were allowed to pay artists below market rate5. 

But It ensured that the vast majority of digital services - today numbering over 1,800- would 

pay a fair, market rate to performers. 
238 

f 

Under this framework, the industry has exploded; Pandora completed a profitable IPO last year 

and expects to bring in more than $600 million in revenues next year. This framework has also 

attracted others, like Clear Channel, which recently launched iHeart Radio. Clearly, unlike the 

lack of a performance right on terrestrial radio, this framework is not broken and it needs no 

legislative solution. 

Instead, H.R. 6480 establishes a new, unfair standard by which digital radio will pay less than 

the fair market value for the use of sound recordings. Proponents argue that all digital radio 

services should pay below-market rates similar to those enjoyed by just a few companies, 

including XM/Sirius. But two wrongs don't make a right. If anything, Congress should end 

below market, grandfathered rates, bringing them up to the fair market value rate and properly 

compensating artists for the use of their recordings. 

We strongly urge you to stand up and oppose H.R. 6480 on behalf ofthe hard-working 

recording artists and singers who deserve to receive fair pay for air play. 

Sincerely yours, 

Terrie M. Bjorklund 

National Director of Government Affairs and Public Policy 
239 

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241 

TAXPAYERS 

PROTECTION 

ALLIANCE 

May the Market Force Be With You 

Dallid Williams 

11 -26-2012 al 08:09 am 

The House Judiciary Committee is holding a hearing this 

week on proposed legislation that could lock ,n Ihe way 

people currenUy listen to Internet radio, Pfe~et1ting the 

de~elopment of new business models. The hearing will 

address royaltles that are paid by Internet, cable, and 

satellite radio stal>ons for the music they play. Owners of 

cop)lJighted material are subject to compl.llsory licenSIng. 

W\lictJ means Itlat an Indillidual Of company that wants to 

use yaluable commerclal copyrighted music can do so 

without seeking consent from the owner, as 101"19 as they are 

willing to pay a fee fixed by the government. Nothing 

prevanlS a digital radiO company and a music owner to 

negotiate a tree market deal outside the compulsory license, but most use it. This is how an 

arti5t or rlKOfd label g~s pilid and j5 a critic .. 1 concept when il come, to listening to digit .. , r .. dlo 

on-line or via cable or satellite, 

CurreoUy, Pandora, and all other digital radio seNices, pay this go~emrne., set fee for the 

mUSiC they use to support their bUSinesses. The rate standard used by the government to set 

this fee was established under a 1998 law, and it requires that an "expert panel" use the free 

market as a benchmark to determine what should be paid to ownllfS for the use of their music, 

Three companies (satemte and cable radio companies) were "grandfathered" In under a lower 

rate standard, because they eXisted before the new law was passed. This lower standard 

assures that the fee set b~ the go~ernment tor the use of music by these three companies will 

not "disrupt" their business models or ted1nology, Unhappy with their current financial 

arrangement, whict1 they actually WlJrked out in the marketplace with music creators, Pandora 

now wants to lower the markel,based rate standard that applies to all companies launched after 

1998 to the lower standard that prevents disruption of their current model so they can pay 

below-market rates, 

The problem Is that Pandora isn't trying to gel this below-market rate on their own, by, for 

example, offering benefits in the mano.elplace that will make up the difference 01 that might 

otherwise appeal to lt1e owners 01 the music. Instead, they are using legislative channels to try 

and lower their costs, Legislation offered by Represantative Jason Chaffelz (R-Ut3h) and Sen. 

Ron Wyden (o-Ore.) would Institute, on top oftha compulsory license, a go\iemmant-fOlced 

subSidy creating below-market pOCes. According to Roil Call, "It would require the Copyright 

Ro~alt)r Boan::! to e~aluate Internet radio stations USing the same standard as appjied to satellite 

and cable radio pro~iders, which, in effect, WlJuld lead to lower rates lor the internet stations." 

ht1p:ll_w protectlngtaxpaver~.org/lndex.php?b1og&action~vi w&po't_id 279 

Cl Copyright Taxpaye ~ Protection Alliance 
242 

f 

Let's be honest, the last thing taxpayers need is another bureaucracy choosing winners and 

losers with no marketplace benchmarks or involvement. 

There is no reason that Pandora should get this rate and there is no reason to get the 

government more involved. Taxpayers and consumers want new services born in the 

marketplace that offer better technology and better services for lower prices. They don't want 

the government to lock in or prevent disruption of entrenched services that are political 

favorites That's not good for anyone Over the past five years, there has been an explosion of 

Internet radio services going from from 855 to nearly 2,000. This is a whopping 134 percent 

increase. According to Music Business Journal, "Pandora is projecting total revenues around 

$430 million for this full year and has reported steady growth in active users since 2008 as well 

as an 80% increase in total listener hours since 2011." 

Pandora's expenses are a different story. It has been reported that over 50 percent of their 

revenue now goes towards licensing fees and Pandora claims that they are at a competitive 

disadvantage because of the three cable and satellite services that were grandfathered in under 

the old rate standard. That ignores the reality that there are 1,800 other services that operate 

under the more appropriate current standard of "what a willing buyer would negotiate with a 

willing seller" in the marketplace. 

It is no wonder that Pandora wants to change their fee structure but it is totally inappropriate for 

them to get the government involved. They should use some good old fashioned common 

sense and look for ways to raise revenue and/or cut costs in other areas. 

If government is to do something at all, a logical and fair resolution would be to eliminate the 

grandfathered below-market rate standard granted to the older entities so everyone is treated 

the same under a market-based rubric, rather than create new price controls for the thousands 

of companies created in an open market. 

http://www. protecti ngtaxpayers. 0 rg/i ndex. p h p? b I og&a cti 0 n=vi ew& posU d=Z 79 

© Copyright Taxpayers Protection Alliance 
243 

Public Knowledge 

Tt~timo[ly of Jodie GrifTon 

Stan' Anomey 

Public -Knowledge 

Before 11l1" 

US. Houseof Representatives 

CommiltCll on the Judiciary 

Subcommittee on lmcllet1ual Propeny. CompeTition. and the Imernet 

Hearing On 

Music Licensing Pan One: l.egislation i n th 11 21h Congress 

Washinl{lon. DC 

Novemher 29, 2012 
244 

Testimony of Jodie Griffin 

Statl Attorney 

Public Knowledge 

Before the 

U. S. House of Representati ves 

Committee on the Judiciary 

Subcommittee on Intellectual Property, Competition, and the Internet 

Hearing On Music Licensing Part One: Legislation in the II2th Congress 

November 29, 2012 

Executive Summary 

The Internet Radio Fairness Act (IRF A) sets out to create fairness in the radio 

marketplace. To actually achieve that goal, IRF A must follow three key principles: 

(I) Encourage Markets. TRFA must use a royalty standard that encourages innovation in 

a robust and sustainable online radio marketplace. 

(2) Treat Like Services Alike. IRF A must apply the same royalty standard to a/l types 

of radio services, including online, cable, satellite, and AMIFM radio. 

(3) Compensate Artists. IRF A must ensure that the radio marketplace fairly 

compensates actual artists. 

Without anyone of these principles, IRF A would at best be a missed opportunity and at 

worst could sideline artists and innovators and entrench power structures that discourage new 

entrants in the market. 

Tn its present form, TRF A succeeds at the first goal and take steps towards achieving the 

second, but more work must be done to create a comprehensive reform of the online radio 

marketplace The § SOl(b) factors are a proven standard, taking into account the interests of 

parties on all sides, including the public. Accordingly, these factors should be applied to all 

forms of radio services, including traditional AMIFM broadcasting, which currently pays no 

sound recording royalties at all. IRF A currently does not require AMlFM radio to pay any sound 

recording royalties: this exemption should be eliminated, and AMIFM radio should pay royalties 

set under the same rate as that used for cable, satellite, and online radio. Favoring incumbent 

technologies over innovative new upstarts will only stunt the growth of the music business and 

discourage entrepreneurs and investors from entering the market. 

Finally, the chief stated objection of many opponents to IRFA is that the change in 

ratemaking standards will decrease overall payouts to artists. Although this concern will not 

come to fruition if the § SOl (b) standard succeeds in stimulating the growth ofthe online radio 

business overall and if the bill brings AMIFM radio into the fold, IRF A could add further 

structural protection for many individual artists by increasing the percentage of royalties that 

SoundExchange pays directly to the artist. 

2 
245 

Introdnction 

To achieve true fairness in Internet radio, the Internet Radio Fairness Act should have 

three main goals: 

(1) Establishing a workable royalty standard that encourages innovation in a robust and 

sustainable online radio marketplace. 

(2) Applying that royalty standard to all types of radio services, including online, cable, 

satellite, and AMIFM radio. 

(3) Ensuring that royalty splits set by law distribute an adequate portion ofthe royalties 

directly to artists. 

The online radio marketplace has the promise to be a robust and competitive market that 

benefits artists and consumers alike. Like many new technologies, online radio may also shake 

up the incumbent power structure and gatekeepers in the recorded music industry by helping 

artists reach consumers more meaningfully and get paid more directly. This opportunity should 

not be squandered, and the law should not waste the potential of the online radio marketplace by 

subjecting it to different rules and higher royalty rates than its predecessors and current 

competitors, such as AM/FM, cable, and satellite radio.' 

Online radio services currently pay the highest royalty rate of all radio services because 

its rates are set by the government under a different standard: the so-called "willing buyer/willing 

seller" standard. This standard, however, is ill-suited to creating reasonable rates for online radio: 

it was created before the online radio marketplace began to bloom, so there is no actual 

marketplace on which to base the rates, and the standard fails to take into account the uniquely 

monopolistic nature of the marketplace, since only SoundExchange can currently negotiate and 

administer the relevant rights. 

1n contrast to the high rates paid by online radio, terrestrial broadcasters pay no sound 

recording royalties at a1l 2 Thus, services that make essentially the same use incur very different 

costs, depending only on the type of technology they use to send out programs to listeners. This 

creates a disincentive for companies to develop and invest in new technologies that provide new 

avenues for musicians to reach their fans. 

The willing buyer/willing seller standard was set in 1998, when broadcasters did not 

seem to fully appreciate the future of online radio, and pure online radio services had not yet 

become significant industry players. We have now seen how this standard has proven itself 

incapable of leading to reasonable royalty rates for the market, and at the same time we have 

seen how similar services using incumbent technologies thrive under lower royalty rates. The 

only way to encourage growth in the radio marketplace and ensure reasonable compensation to 

I These commcnts will usc "radio." without further qualification, to mcan all nonintcracLivc music 

streaming sen'ices, including cable_ satel1ite, AMIFM, and online radio sen'ices. 

2 See 11,e Perjormance Rights Act: Hearing on H.R . ./789 Bejore the H. Comm. on the Judiciary. I 10th 

Congo (200S) (statement of Nancy Sinatra) ("The competitive landscape thus is biased in favor of the old 

establishment players and against new start-up and innovative technologies .... Now we have a situation 

where one format-AM/FM radio-has a competitive advantage over another: digital radio ... This isn't 

any more fair to digital radio than it is to artists."). 

3 
246 

artists is to require all radio services-online, satellite, cable, and AMlFM-to pay royalties for 

their use of sound recordings, and to use the same standard to determine those rates. 

lRF A takes several important steps towards creating parity in the radio marketplace while 

still arranging for reasonable compensation to artists. However, in order to achieve full fairness 

between platforms, IRFA should also include AM/FM radio broadcasters in its royalty scheme, 

and include structural protections for artists, like a higher percentage of payments made through 

the compulsory license and consideration in the § 801 (b) factors. 

1. IRFA Should Establish a Workable Royalty Standard that Encourages an Innovative 

and Sustainable Online Radio Marketplace. 

The Internet Radio Fairness Act proposes shifting the standard by which online radio 

royalty rates are set from the willing buyer/willing seller standard to the factors set out in § 

80 I (b) of the Copyright Act3 The § 80 I (b) standard is more appropriate and useful for 

determining reasonable online radio royalties, and indeed should be used for terrestrial radio as 

well. 

The § 801 (b) standard is currently used to determine royalty rates for digital cable and 

satellite broadcasters, namely: Sirius XM, Music Choice, and Muzak'" This same standard is also 

used to set royalty rates in several other areas of the music industry, like mechanical 

reproduction royalties paid by record labels to songwriters, and for broadcasters' payments to 

performing rights organizations ASCAP, BMI, and SESAC5 

rate: 

Section 80 I (b) directs the CRB to consider a set of factors in setting the relevant royalty 

(A) To maximize the availability of creative works to the public. 

(B) To afford the copyright owner a fair return for his or her creative work and the 

copyright user a fair income under existing economic conditions. 

(C) To ret1ect the relative roles of the copyright owner and the copyright user in the 

product made available to the public with respect to relative creative contribution, 

technological contribution, capital investment, cost, risk, and contribution to the 

opening of new markets for creative expression and media for their communication. 

(D) To minimize any disruptive impact on the structure of the industries involved and on 

generally prevailing industry practices 6 

3 See 17 USC § 80l(b). 

"Glenn Peoples, Business Matters: Let's Get Ready To Rumble! 2013's Dueling Internet Radio Royalty 

Bills. BILLBOARD, (Sepl. 27. 2012). hllp:!/w",\.biliboard.biLlbbbiLlinduslry/digilal-and-mobilelbusinessmatters-let-s-get-ready-to-rumble-l007962272.story. 

5 See 17US.C §§ 114(f)(I)(B). 115,116. 

" 17 USC § 801(b) 

4 
247 

These factors balance considerations for the level of compensation that should be 

distributed to the artists with the public interest in the distribution of works and the impact of the 

rates on the companies that will have to pay them. The § SO I (b) standard is also on its face more 

in line with the Constitutional purpose of copyright law-creating economic incentives with the 

ultimate purpose of encouraging artists and platforms to create new works and bring those works 

to market. 7 

In past ratemakings, the CRB has used evidence from relevant or similar markets to 

estimate the upper limit of the compulsory rateS The CRB then applies the four factors of § 

SO I (b) to adjust the rate as necessary9 The first two factors are generally interpreted in the 

copyright owners' favor, while the third presents an opportunity for all parties to put forth 

evidence of the economic value of their contribution to the supply chain. In the past, the royalty 

rates have been lowered under the fourth factor to avoid significant disruption to satellite radio, 

but would also present an opportunity for copyright owners to present evidence on, for example, 

any substitution etfects the online radio marketplace has on other product markets. Either way, 

the fourth factor does not in itself protect companies in any part of the process from going out of 

business. 10 

a. The Standard Proposed in IRF A Will Reach the Best Result for the Market 

The factors set out in § SOl (b) are more likely to consistently reach reasonable royalty 

rates than the willing buyer/willing seller standard. Practically speaking, the § SO I (b) standard is 

likely to result in lower royalty rates (but not necessarily lower overall royalty payments) for the 

online radio market than the rate online radio companies currently pay. For example, in 200S, the 

CRB set a rate of 6-S% for subscription services and 7.25-7.5% for satellite digital audio radio 

services under the § SOI(b) factors"-far lower than the rates paid by online radio, which often 

equate to more than half of their revenue 12 Notably, the major record labels have vigorously 

7 U.S. CONS"]. art. I, § 8, d. 8. See alsoMazerv. Stein, 344 U.S. 201,219 (1954) CThe economic 

philosophy behind the clause empowering Congress to granl patenls and copyrights is the conviction U,at 

encouragement of individual effort by personal gain is the best way to advance public welfare through the 

talents of authors and inventors in 'Science and useful Arts. '''). 

"Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio 

Radio Sen ices, 73 Fed. Reg. 16.4080,4093 (Jan. 24, 2008), 

http://www.loc.gO\/crb/fedreg/2008!73fr40S0.pdf. 

917 usc. § 801(b)(l)(A)-(D): Detemlinalion of Rales and Ten11s for Preexisling Subscriplion Services 

and Satellite Digital Audio Radio Services, 73 Fed. Reg. I G, 40S0. 4093 (Jan. 24. 2(08). 

10 Detemlination of Rates and TenllS for Preexisting Subscription Services and Satellite Digital Audio 

Radio Services, 73 Fed. Reg. 16,4080 (Jan. 24, 200S) (CRE adjusting rates downward to avoid 

disruplion lo salellile companies): 63 Fed. Reg. 89.25394,25408 (May 8, 1998) CThe law rcquires lhe 

Panel, and ultimately the Librarian_ to set a reasonable rate that minimizes the disnlptiYe impact on the 

industry. It does not require that the rate insure the survival of every company."). 

II Royalty Fees for the Digital Perfonnance of Sound Recordings and the Making of Ephemeral 

Phonorecords by Preexisting Subscription Services, 37 C.F.R. § 382.2 (200S). 

12 Dcten11ination of Rates and Ten11s for Preexisting Subscription Serviccs and Satellite Digital Audio 

Radio Sen ices, 73 Fed. Reg. 16.4080,4093 (Jan. 24, 2008). To pullhis number in a global conlexl, 

5 
248 

opposed applying the § SOI(b) standard to online radio royalties without mentioning that they 

themselves use the § 801(b) standard for the royalties they pay to sOllb'Writers.13 

The § SOI(b) is no guarantee, however, that rates will always be a simple low percentage; 

digital cable services, for example, must pay a minimum of$IOO,OOO per year as part of their 

royalties. '4 And in certain circumstances the CRB has in the past determined that none of the § 

SOl (b) factors justified lowering the rates from the market evidence presented by the parties.15 

In contrast to the § 80 I (b) factors, the willing buyer/willing seller standard requires the 

CRB to envision the rate that would be paid in a hypothetical marketplace. 16 Section 114 also 

requires the CRB to consider the promotional or substitutional etfects of the online radio service 

for the sound recordings, and the relative contributions of the copyright owner and radio service. 

These factors are, incidentally, all still included in IRF A: the relative contributions of the parties 

and the substitutional effects of the service are included in the third and fourth factors of § 

80 I(b), respectively, and the promotional value is listed separately in IRF A, as it does not 

cleanly fit into any of the existing § SOl (b) factors. 

Under the willing buyer/willing seller standard, the CRJs look for the perceived 

economic value of the sound recordings, as demonstrated by the fees that two hypothetical 

parties in a competitive marketplace would willingly agree to. The difficulty with this standard is 

that the realities of the marketplace are far removed from a hypothetical negotiation between a 

willing buyer and a willing seller. For one thing, the online radio market did not begin to grow 

until after 1998 (Pandora, for example, did not launch until 2000), so the CRJs never had an 

actual marketplace on which to base their rates. Additionally, the law never granted a digital 

audio transmission right without either exempting web casters or establishing a compulsory 

license. This means that a marketplace with online radio services and rightsholders with the 

power to withhold permission has never existed. Moreover, the monopolistic nature of the 

marketplace in these negotiations means that there is no competitive benchmark to compare the 

rates to, so it is very difficult to determine what an undistorted market would look Iike.'7 

European broadcasters pav 3-8% of revenue to artists, and 3-5% of revenue for all radio broadcasts goes 

towards music publishers and songwriters. 

13 S'ee 17 U.S.c. § 115. 

14 37 C.F.R. § 382.2 (2008) 

" Mechanical and Digital Phonorecord Delivery Rate Determination Proceeding; Review of Copyright 

Royally Judges Delerminalion; Final Rule and NOlice, 74 Fed. Reg. 15,4510.4523-4525 (Jan. 26. 2009), 

hllp:/ /www.loc.gm/crb/fedreg/200917 4fr45 I O.pdf. 

16 17 U.S.c. § 114(1)(2)(B) ("In eSlablishing rales and lenus for lransmissions by eligible nonsubseriplion 

sen,ices and new subscription services. the Copyright Royalty Judges shall establish rates and temlS that 

most clearly represent the rates and terms that would have been negotiated in the marketplace between a 

willing buyer and a willing seller."). See also 17 U.S.c. §§ 114(j)(6). (8). 

17 See 11,e Performance Rights Act and Partty among MUSIC Delivery Plat/arms: Heartng on S. 379 

Be/ore the S. Comm. on the Judiciary. Illlh Congo (2009) (slalemenl of Roberl KimbalL Execulive Vice 

President for Corporate Development & General Counsel, RealNetworks. Inc.) at 9. 

http://judiciary.senate.govlhearings/testimon)'.cfm?id~401l&wiUd~8164. SoundExchange is the only 

enlily with aulhorily 10 license. collecl, and dislribule digilal performance royal Lies for webcasling. 

SoundExchange OrganiLalion, hllp:l/www.soundexchange.com/aboutl. 

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The rates set under the willing buyer/willing seller standard have repeatedly been so high 

that that Congress has had to intervene to encourage industry negotiations that would reduce the 

rate set by the Copyright Royalty Board (CRB), and has led to many web casters going out of 

business entirely." 

IRFA's additional amendments to the ratemaking deliberations will improve the 

likelihood that the CRB will be able to set reasonable rates that encourage new investment in 

technology while giving artists a fair return. IRFA instructs the CRB to fairly consider using a 

rate structured as a percentage of revenue, which is more flexible and better allows online radio 

companies to budget for their expenses. Tn fact, the privately negotiated PurePlay Agreement 

includes a percentage of revenue option, although the radio service is still required to pay the 

greater of the percentage of revenue or a per-stream fee. 

lRF A also rightly instructs the CRB to not consider agreements struck under past law as 

precedent In intellectual property, the scope and degree of exclusivity of the right is what sets 

the market to begin with, so it would be counter-productive to tie the CRB 's decisions to a 

"market" that was negotiated under the auspices of a different royalty standard, or negotiated in a 

different market, like interactive streaming, that has no compulsory license at all. Such 

agreements are so far afield from the IRFA standard that they would be more likely to confuse 

than to be helpful in the CRB' s deliberations. 

There is, however, one way in which IRF A should be amended to alter the § 801(b) 

standard. Section 80 l(b) currently only refers to copyright owners and copyright users, but not to 

artists directly19 Often the copyright owner of a sound recording will be a record label, but the 

label's interest in these proceedings may not always align with the actual creator. IRFA should 

remedy this and explicitly include artists in the second and third factors of the § 801(b) standard. 

b. The Economics of Online Radio and Sound Recording Royalties 

The economics of radio royalties are notoriously complicated. Similar services are 

currently subject to different standards based on the technology they use, some technologies are 

exempt altogether, and the rates set by the CRB are often bypassed in favor of negotiated 

settlements. Research into consumer use of online radio and other streaming platforms is 

relatively new, and much more data is needed to give a complete picture of the online radio 

business. 

18 See Webeaster Settlement Act of2009. S. 1145, Illth Cong .. 1st Sess. (2009): Webcaster Settlement 

Act of 200R. H. R. 70R4, II Oth Cong .. 2d Sess. (200g): Small Webcaster Settlement Act of 2002. Pub. L. 

No. 107-321, § 3, 116 Stat. 2780, 2781 (suspending payments under CARP rates in [wor of subsequently 

negotiated agreement). For a more detailed history of online radio legislation and ratemakings. sec 

Appendix. 

19 17 U.S.c. § 801(b) 

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1. Online Radio: Dominated by One ('ompany and Devoid ojPrujits 

Even a brief overview of the online radio marketplace will reveal that what should be an 

innovative, competitive market is instead a market dominated by one company in which not one 

significant company have made a profit. 

The online-only web casters are front and center in the TRFA debate: these are the services 

that provide noninteractive radio using the Internet Their service is most analogous to AM/FM 

radio broadcasters,20 but they must pay a compulsory license set under the willing buyer/willing 

seller standard, while AMIFM broadcasters need not pay sound recording royalties at all. 

The most prominent online-only radio service today is Pandora. Pandora broke new 

ground in the radio business, creating personalized online radio stations by mapping the 

"genomes" of songs and using its calculations to make recommendations to users. The company 

now streams 1.1 billion hours of music per month to 58 million users, and has a $1.4 billion 

market capitalization. Pandora currently enjoys 70% of the online radio market, but only 6.4% of 

radio listening overal!.21 

Pandora is subj ect to the willing buyer/willing seller standard for compulsory licenses, 

but currently operates under the privately negotiated 2009 PurePlay Agreement, which gives it 

around 40% off the rates dictated in the latest CRB ratemaking. This deal expires in 2015. Even 

so, Pandora paid 64% of its revenues in royalties in the first and second quarters of2012, and 

posted a net loss of $5.4 million in the second quarter alone22 Pandora incurred this loss despite 

increasing its advertising and subscription revenues by 51% to $101.3 million in the second 

quarter of201223 Despite its growing revenues, Pandora's licensing costs are growing more 

quickly: up 79% to $60.5 million in the second quarter. As ofJanuary 1,2012, Pandora had an 

accumulated deficit of $104 million. 

Besides Pandora, the online radio space includes a handful of smaller players 

experimenting with their own revenue streams and business models for online radio. Rdio, for 

example, pays artists $10 for every subscriber they bring to Rdio as a way to build a user base 

and build relationships with artists directly24 7Digital recently announced $10 million funding 

for, among other things, a radio service 25 Senzari, a Miami-based competitor to Pandora, has 

20 See Bnlce Houghton, If Pandora Can Write Iii Wayne A $3 Million Check. Why Should They Pay 

Less? HypeBol (Del. 10, 2012), hllp:llwww.hypebol.com/hypebo1l2012/1O/pandora-says-lop-arlislsmake-lm-a-year-2000-makc-more-lhan-IOOOO.hlml. 

21 Tim Weslergren, Pandora and Artist Payments. Pandora (Ocl. 9. 2012), 

http://blog.pandora.com/pandoraiarchives/2012/10/pandora-and-art.html. 

"Pandora Media Inc. Form 10-Q (Sepl. 4. 2012). 

23Id. 

24 Rdio Artist Program (last visited Nov. 26,2012), 

http://www.rdio.com/artistprograml..utm_source~promoted _ US _ blog&utm _content~ArtistProgram_ 2012 

_10_021. 

" Tim Ingham, 7digitallaunches streaming service, secures L6m investment, MUSICWEEK (Oct. 19. 

20 12). hllp:1 Iwww.musicweek.com/new s/readl7 digilal-Iaunches-streaming -seTV ice -secures-6mimeslmenll052227. 

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been acquired by Disco Volante--the same Berlin-based start-up that created wahwah.fm, the 

now-defunct online radio service that went out of business after trying to negotiate royalty rates 

directly with tbe major labels. 

Other companies have responded to the pressures of the online radio environment by 

bundling their radio services with other products. The Sam sung Music Hub combines a cloud 

storage locker, download store, and streaming radio service with unlimited music. Spotify, the 

interactive streaming company partially owned by the major record labels, has recently 

introduced a free online radio service for iOS and Android operating systems. 

The recently revamped social networking site My Space has also recently set its focus on 

the music market Parent company Interacti ve Media Holdings is trying to raise $50 million to 

re-launch MySpace as a competitor to Spotify and Pandora26 MySpace' s traffic is up 36% since 

December 2011, but it will still only generate $15 million in revenue this year. This means that 

MySpace will lose $40 million in 2012, and in a pitch to investors, Interactive projected that it 

will lose another $25 million in 2013. Notably, MySpace's owners say its biggest advantage over 

Spotify and Pandora is that it pays a lower per-stream rate for music, in part because MySpace 

pays no royalties to the 27 million unsigned artists who use MySpace-50% of the music played 

on the site. This disparity between how MySpace treats record labels and how it treats unsigned 

musicians would certainly undercut the sustainability of an independent music career if it 

became standard among digital music services-which is why royalty rates must be set at a level 

that encourages robust competition among music services, so no single service holds outsized 

leverage against musicians. 

Finally, many online radio companies that have previously used the compulsory licenses 

have since gone out of business under the weight of high licensing fees. 

2. Satellite Radio: Thriving, Growing, and Attracting New Listeners 

In contrast to the online-only webcasters, Sirius Satellite Radio-the subscription satellite 

service owned and operated by Sirius XM Radio27-is tbriving while paying approximately 8% 

of its revenues in sound recording royalties under rates set with the § 801 (b) standard, and has 

developed a healthy business model. In the third quarter of2012, SiriusXM achieved record 

revenue of $867.4 million, $7577 million of which was subscriber revenue. Sirius's adjusted 

earnings before income taxes, depreciation, and amortization was $245 million, and its year-todate subscriber acquisitions were up 27% from one year ago, to 1.47 million, resulting in a 

record 01'2337 million total subscribers. For tbe entire year 01'2012, SiriusXM expects revenue 

just under $3.4 billion and adjusted EBITDA of $900 million28 

Nicholas Carlson. Lh.AKh.D: MySpace·s MOSier Plan 10 Raise 550 Million and Relaunch as a 5jlOiifj) 

KilZer. BUSINESS INSIDER (Nov. 19. 2012), htlp:!/www.businessinsider.com/leaked-myspaces-masterplan-to-raise-50-million-and-re-launch-as-a-spotity-killer-20 12-11 ')op~ I. 

27 Liberty Media owns 48% of SriusXM· s common stock. but has a pending request at the Federal 

Commuuications Commission to convert its preferred shares into common shares and thus acquire a 

controlling interest in SiriusXM. 

Glenn Peoples, SiriusXM CLD Karmazin Calls Internet Radio 11ace to the Bottom' on Horning, Call, 

BILLBOARD (Nov. 1. 2012), hllp:! Iwww. billboard.biLlbbbidinduslry/digilal-and-mobile/siriusxm-ceokarmazin-calls-Tnternet-radio-l007995612.story. 

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The royalties paid by satellite, cable, and online radio are all administered through 

SoundExchange, an entity formed by the RIAA in 2000 to administer royalties under the digital 

transmission compulsory licenses. After the tirst webcasting ratemaking, SoundExchange was 

spun ofl' from the RIAA and re-launched as a non-profit organization29 SoundExchange is 

currently the only entity authorized by the Library of Congress to negotiate on behalf of sound 

recording copyright owners and administer, collect, and distribute the compulsory license 

royalties 

3. Online Radio IT.mge 

The relatively recent entry of online music services has benefitted artists and consumers 

alike, and although online radio has a not insubstantial share of radio listeners, there is still much 

room for grow1h. According to one recent NPD study, 50% of 96 million Internet users listened 

to online streaming services in the past 3 months. 37% of US Internet users listened to online 

radio, and 36% of US Internet users listened to an on-demand streaming service (although these 

groups may overlap significantly). In the past year, the Internet radio audience grew 27% and the 

on-demand music audience grew 18%30 The extent to which these services supplant older modes 

of consuming music is still being studied-the NPD study reportedly found that Pandora users 

were on average less likely to use AMlFM radio, CDs, and portable music players than they were 

in 2009, but did not examine how much demographic changes in Pandora's audience or the use 

of other services like Spotify contribute to the correlation. On the other hand, that study also 

found that the average Pandora listener purchased 29% more music during the second quarter of 

2012 compared with last year, even though music purchases went down overall." 

The emergence of online radio has also brought new opportunities for artists. For one 

thing, 64% ofusers of online music streaming services reported rediscovering older music, and 

51 % reported discovering new music on the service 32 And more importantly, as discussed 

above, online radio services are part of the emerging online music platforms that empower artists 

to remove unnecessary middlemen. 

29 This struchlral change may have been made in response to allegations of anti competitive conduct by the 

RlAA through SoundExchange. See Webcaster Alliance, Inc. v. RIAA, No. C-03-3948, 2004 WL 

1465722,2 (N.D Cal. Apr. L 2004). 

'" NPD Music Acquisition Monilor, hllps:llwww.npd.com/wps/porlallnpd/us/ncws/prcss-rc1cascs/Ulc-npdgroup-Internet -radio-and -on -demand-music -services-rise-putting -pressure-on -traditional-forms-of-ll1Usiclistening/. 

31 Russ Crupnick. Senior Vice President ofTndustry Analysis. The NPD Group, citing NPD Music 

Acquisition Monitor study. 

12 NPD Music Acquisition Monitor, https:llwww.npd.comlwps/portallnpd/us/news/press-releases/the-npdgroup-Inlernel-radio-and-on-demand-music-ser\'ices-rise-pULling-pressure-on-Lradilional-foIms-of-musiclistening/. 

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4. The Nascent Online Radio Market 

Despite the great promise of online radio, many webcasters have left the business and a 

surprisingly small number have achieved a critical mass of market share. Notably, the companies 

that have lost their online radio businesses include large corporations like Yahoo I and Microsoft 

in addition to many small entrepreneurial webcasters. When companies with deep technological 

expertise and enormous financial backing cannot create a profitable online radio service, small 

start-ups and independent companies have little chance of ever reaching a profit. 

The financial difficulties of online radio companies in turn discourage investment in the 

field. As Union Square Ventures partner Fred Wilson noted, music services face extremely high 

startup costs compared to other industries, like software development.'1 A music startup will 

need anywhere from $5 million to $20 million just to launch its service, much of which goes 

toward licensing costs. As a result, it is more difficult for would-be music company founders to 

find funding. Wilson did, however, predict that more advertising dollars would eventually enter 

the online radio space-but this prediction can only come true if online radio services become 

sustainable enough to survi ve the transition. 

Online radio stations have reportedly had significant trouble increasing advertising 

revenue enough to keep up with corresponding increases in listener hours. Some point out that 

increasing the number of advertisements per hour past a certain point can lead to a service losing 

its user base: users tend to leave freemium services around the time the service starts interrupting 

streams with ads.·l4 As a result, after a certain point in time, the online radio service will be under 

pressure from its funding to increase advertisement frequency to increase revenues, but if the 

company does so its users will flock to a newer, ad-free radio service that is not yet under 

pressure to monetize its business model. Royalty rates exacerbate this problem: rates that are too 

high cause unsustainability for online radio by forcing start-ups to choose too early between 

achieving a product that consumers will respond to in the long term, and covering content costs 

to appeal to investors. 

In large part due to the disproportionately high royalty rates that online radio pays 

compared to its satellite, cable, and terrestrial competitors, the online radio marketplace has the 

somewhat unique and very concerning characteristic of being devoid of profits. This alone is one 

of the most persuasive points for why the online radio royalty rates are currently set too high. 

For-profit companies, like most online radio services, have ample incentive to increase their 

revenues and earn a profit. The online radio market has yet to produce a single major company 

that could create a profitable business model. Investors may understand that companies will need 

to run a deficit in their first few years, but this trajectory is not sustainable in the long term, and 

33 Sarah Mitroff, So You Want in on the Music Biz? Fred Wilson Has .f. Things to Tell You. WIRTiD (Noy. 

16. 2012). http://www.wired.com/business/2012/11/music-startups/. 

l4 Joey Flores, Why Music Startups and Ad Networh Suffer from "Flavor of the Month Syndrome . .. 

SIDEWINDER.FM (Ocl. 16. 2012), hllp:llsidewinder.1.in/posl/33702805158/why-music-slarlups-and-adnelworks-sulTer-lrom-l1a\or. As Joey Flores pUl il, "The only tiling slopping ad\erlising from being a 

sustainable model for music startups right now is royalties." Deep Think: .Joey Flores of Harhits on the 

Challenges of Building a Music Startup, HYPhlJOT (Oct. 30,2012), 

hllp:l Iwww.hypebol.comlhypebo1l20 1211 01 deep-lhink -joey -l1ores-of-earbils-on-lhe-challenges-ofbuilding-a-music-slarlup.hunL 

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the overall health of the online radio marketplace will decline if nothing is changed. As more 

online radio companies go out of business, less music will be heard via online radio, which will 

ultimately hurt consumers and musicians alike. 

It is also important to keep in mind the relative sizes of the business segments at play 

here. Thus far this year, SoundExchange has distributed a total of $316.9 million in royalties for 

all compulsory licenses.·l5 Tn contrast, David Touve, Assistant Professor of Business 

Administration at Washington and Lee University, has estimated that terrestrial radio stations 

would pay nearly $2.5 billion per year in royalties if they paid the same royalty rate as online 

radio does:'6 This estimate, however, does not attempt to include any decrease in the size of the 

AMlFM radio business as a result of the royalties, nor the percentage of terrestrial radio 

programs that does not include music. Billboard estimated that the rates, adjusted for non-music 

listening, would be more towards $2.05 billion instead 37 In a $15 billion industry, this would 

mean that AMlFM broadcasters would pay 20% of their revenue in fees 38 While online radio 

may have a chance at being the future of music access, it is by no means the dominant player in 

the current marketplace, despite being subject to the highest fees 

c. A Cautionary Tale: Interactive Streaming Services 

Rather than go out of business entirely, there is another path that online radio companies 

could take in pursuit of a profitable business model: giving up their independence and giving 

equity stakes to companies that are already dominant in the music business, like major record 

labels or large AMlFM broadcast networks. This would only serve to entrench incumbent power 

structures and stifle innovation in the online music business, and the compulsory license should 

certainly not force this result on the industry by making online radio choose between 

unsustainably high compulsory license rates and private deals with the dominant gatekeepers. 

This type of development has already occurred in the interactive streaming market, where 

digital music services do not have any compulsory license to rely on and so must negotiate 

directly with the record labels. The major labels have repeatedly abused their leverage in these 

negotiations: demanding outsized advance fees before the services even launch, requiring royalty 

rates disproportionately high compared to those given to independent musicians, and even 

demanding ownership in the streaming companies as a condition to getting a license. Spotify, for 

35 Ed Chrislman. SoundHxchange Pays OUI 5122.5 MJillOn In Q3 -- Its Largesl Sum Yel, BILLBOARD 

(Nov. 14, 2(12), http://www. biliboard.biz/bbbiziindustry/digital-and-mobile/soundexchange-pays-outI 22-5-million-in-1 0080 I 5922.story 

30 David Touve, $2.5 Rillion: The Rig Numher that "Rig Radio" could owe each year ifitpaid music 

royalties at Pandora's rates (Nov. 19, 2012), http://davidtouve.eom/2012/l1/l9/2-5-billion-the-bignumbers-lhal-big-radio-eould-owe-each-year-if-il-paid-music-royallies-al-pandoras-rales/. Touve used Lhe 

"purepla)'" webcaster rate of $0.00 II per perfonnance per listener for these calculations. Touve also 

calculated rates under the general webcaster rate of $0.0021 per performance per listener. which were 

significantly higher. 

17 Glenn Peoples, Business Matters: If Big Radio Had Pandora's Royalty Rate. It Would Owe Billions, 

BILLBOARD (Nov. 20. 2012), hllp:!/www.billboard.biLlbbbidinduslry/digilal-and-mobilclbusinessmatters-if-big-radio-had-pandora-I 008024632. story. 

38 In conlrasl, Pandora paid out 50.3~) of its revenues Lo SoundExchange in Lhe 1l1osL recent fiscal quarter. 

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example, is partially owned by all of the major record labels, and has been dogged with 

accusations of giving independent and unsigned musicians a lower royalty rate than major label 

musicians for the same number of streams. The incumbents have thus been able to use their 

copyrights to create a tax on innovation in the interactive streaming marketplace.'9 

As Congress deliberates on the right way forward for Internet radio royalties, it should 

remember how outsized bargaining power can be used to hamper innovation and entrench the 

dominant players. Setting a compulsory rate too high or otherwise unnecessarily driving 

companies to direct licensing deals would similarly give major labels and their representatives 

the opportunity to stymie the progress of the online radio market and disadvantage independent 

labels and unsigned musicians. 

TT. TRF A Should Apply the Same Royalty Standard to all Types of Radio Services, 

Including Online, Cable, Satellite, and AM/FM Radio. 

If IRF A is to actually achieve "fairness" in the marketplace, it cannot allow the law to 

continue to treat the same services di±lerently simply based on the transmission technology used 

by the broadcaster. Fairness requires treating like service alike. IRFA is right to set online radio 

royalties by the same standard as that used for cable and satellite radio royalties, and should be 

amended to also require AMlFM radio to pay royalties under the same standard used by 

everyone else. 

There is no logical reason why the law should impose different royalty standards on 

companies that all provide essentially the same service to consumers. Whetber transmitted by 

cable, satellite, AMIFM broadcasting, or through an Internet connection, radio companies all 

ofler to consumers a noninteractive stream of music or other audio programming. Their actual 

royalty payments need not be exactly the same, but the CRB should consider the same factors 

when setting each of their royalty rates. 

This point is much more than legal tbeories and semantics: experience tells us that the 

difference in ratemaking standards has led to wildly divergent royalty rates for companies that all 

provide consumers will substantially similar services. Under the willing buyer/willing seller 

standard and subsequent settlements, Pandora paid $60.5 million-64% of its revenue-in the 

quarter ending July 31, 201240 Meanwhile, under the § 801 (b) standard, satellite radio operator 

SiriusXM pays only 8% of its revenues of $867.4 million for the quarter ending September 30, 

201 241-seemingly paying a similar amount in royalties to Pandora despite having more than 8 

times the revenue. 

Of course, AMlFM radio has the lowest sound recording royalties of any radio services: 

$0.00, despite bringing in $15 billion in revenue. To the extent that the outright exemption for 

19 See Mark Cooper & Jodie Griffin, The Role of Antitrust in Protecting Competition. Innovation. and 

Consumers as the Digital Revolution Matures: The Case Against the Universal-EM I Merger and E-Book 

Price Fixing (June 14. 2012). http://publicknowledge.org/case-against-umg-emi. 

-10 Pandora Media Inc. Fonn 10-Q (Sept. 4. 2012). 

41 Sirius XM Radio Inc. Fonn IO-Q (Nov. 1,2012). 

13 
256 

AMlFM radio was ever justified, it certainly is not now42 AMlFM radio provides listeners with 

essentially the same service as other radio services, and the disparity in treatment only serves to 

entrench industry incumbents and discourage innovation in the market. IfIRF A implements the § 

80 I (b) standard for web casters but lets the AMIFM broadcasters continue to pay no royalties at 

all, the bill will only entrench the current broadcasters, who will get to enjoy lower rates for their 

online retransmissions and a special exemption for their AM/FM broadcasts. This does not help 

competition, it does not help artists, and it does not encourage new companies to enter the 

market. The only solution is to put all radio services under the same ratemaking standard. 

III. IRF A Should Ensure that Artists Are Fairly Compensated. 

Finally, the reforms in IRFA would be incomplete if they failed to ensure that actual 

artists are fairly compensated. The distribution system for the online radio compulsory licenses 

currently offers several important benefits to artists, but IRF A should take this opportunity to 

improve artist compensation under the compulsory licenses. 

The current online radio compulsory license system offers three very important benefits 

to artists: transparency, equal treatment, and direct payment. The license fees paid by cable, 

satellite, and online radio are by statute divided between copyright owners and artists."3 Federal 

law allocates 50% of the royalty to the copyright owner (usually a record label), 45% to the 

featured artist, 2.5% to side musicians, and 2.5% to back-up vocalists. This law offers a level of 

transparency that is practically unheard of in the recorded music business. Very often, all 

revenue related to recorded music distribution is funneled through the artist's record label 

without transparent reporting to the artist, and the artist's contract makes audits of the record 

label's accounting expensive and time-consuming. But under the compulsory licenses, the 

royalty rates and distribution splits are publicized for all to see-an important first step in 

empowering artists. 

The compulsory license also has the benefit of being applicable to all artists, regardless of 

whether they have signed to a major record label, and independent label, or no label at all. By 

applying the same rate across the industry, every musician can receive their fair share of the 

payments made by licensees. 

Finally, the current compulsory license system ensures that the actual artists receive fair 

payment even if they have sold away their copyrights-a practice that is essentially a prerequisite for signing to a major label. Usually, record labels demand copyright ownership and a 

sizable share of royalties from artists in return for their financing, production, and distribution 

services. Moreover, artists usually do not receive any portion of the royalties until she has paid 

back the entire advance investment the label made in producing and promoting the album. But 

42 Many broadcasters have justified their exemption in the past by saying that the promotional value of 

playing the recording on their stations outweighs any yalue they may owe to the recording artist. If they 

arc correct here, Lhe broadcasters can casily present evidence on the prOlTIolionnl value of their service to 

artists, which the eRE would duly consider under the factors set out in § SO I (b) and IRFA. 

43 17 U.S.c. § 114(g)(2). 

14 
257 

under the radio compulsory licenses, artists are directly paid a cut of the royalties, regardless of 

whether they are still in debt to their record labels. 

However, the compulsory license distribution system can and should be amended to 

direct more compensation directly to artists. Rather than the statutory royalty splits discussed 

above, the law should distribute 50% of royalties to the featured artist, 5% to side musicians, 5% 

to back-up vocalists, and 40% to the record label. After all, copyright law's ultimate purpose of 

incentivizing the creation of works is much better served by directing more payments to actual 

artists than by giving intermediaries like record labels take an unnecessarily large piece of the 

pie. This change in royalty splits also offers more structural protection to individual artists, who 

might be less able to engage in the ratemaking proceedings than record labels and webcasters. 

IV. What's At Stake: Online Radio Benefits Artists and Consumers 

Emerging online radio services are part of the relatively recent wave of new online music 

platforms that have been a boon to musicians and their fans alike. 

a. Increasing Consumer Access to Legal Music Services 

From the consumer's perspective, online radio services allow users to access, discover, 

and re-discover music more easily than ever before. Particularly as Internet access spreads and 

music-playing devices become increasingly portable and connected, online radio allows 

audiences to access radio streams in areas where traditional AMlFM broadcasts did not reach. 

Online radio technology also allows consumers to access the music that most resonates with 

them. The global nature of the Internet allows a single niche online radio station to attract a 

geographically diverse listenership, and sophisticated music analysis technology allows 

companies to give users more personalized web casts to fit their specific tastes. This lets 

musicians with widely spread audiences develop those audiences in a way that geographicallylimited AMIFM radio does not. 

b. Empowering Artists and Avoiding Gatekeepers 

Artists also stand to benefit from the emergence of online radio. When the growth of 

online radio services reaches new listeners, future fans can discover their next favorite band. 

Online radio platforms could easily (and often do) incorporate ways for fans to learn more about 

the musician they are listening to, and even can enable direct merchandising or ticketing 

opportunities. Online radio also helps to decrease copyright infringement by giving consumers a 

convenient, affordable way to access music legally. 

Perhaps more importantly, online radio has leveled the playing field to help unsigned and 

independent artists remove unnecessary middlemen and reach fans directly, if they so choose. 

AMlFM radio has always been limited in the number of stations it can have in anyone location, 

and as a result the most popular music-almost always music owned or distributed by the major 

15 
258 

labels-has received a disproportionate amount of airplay. This trend is only exacerbated by 

increasing consolidation in the ownership oflocal radio stations 44 

This scarcity in AMiFM radio outlets created the incentive for money to influence the 

selection of new music for station playlists. Only companies with the largest budgets could play 

this game, and independent artists without the money or connections to improperly influence the 

process were left out45 Tn contrast, online radio allows any artist to reach consumers, and fans 

can just as easily reach stations dedicated to niche genres as they can Top 40 music. When the 

gatekeepers are removed from the equation, the music that gets played is chosen by the artists 

and their fans, not by the most powerful corporate executives. 

As a result, an artist need not sign to a record label or give up her copyright to be played 

on online radio and, thanks to the compulsory licensing regime, she will be paid using the same 

rate as a major label act would. In absence of undue influence from incumbent gatekeepers, new 

technologies can help artists reach consumers more directly, enabling artists to forge their own 

paths and give them the ability to operate independently of traditional distribution intennediaries. 

Where they provide substantial value, intermediaries like record labels can still have a place in 

the business, but building more tools for artists gives them a meaningful choice in how to direct 

their own careers. 

Make no mistake: online radio is an enormous opportunity to create a sustainable 

platform that is both artist- and consumer-friendly. The fact that no major company has been able 

to create a profitable online radio service should be of concern to parties on all sides of the 

recorded music business. 

Conclusion 

The online radio market is complex and still relatively new, but IRFA takes steps in the 

right direction to preserve this promising marketplace while still compensating artists for the use 

of their works. 

IRF A takes a well-planned and principled approach to the rate-setting process. IRF A 

achieves some measure of parity between platforms, which must be extended to include all 

technologies-including AM/FM broadcasters-under the same rate-setting standard. By being 

technology-neutral, the law would allow the most efficient and valuable technology reach its 

appropriate market 

The royalty-setting standard that IRFA sets will also stimulate the growth of online radio, 

bringing new players to the field. The standard follows the basic purpose of the compulsory 

license---to guarantee fair compensation but not going so far as to grant an absolute right to 

refuse a license-is entirely undermined if the rate is set too high. When the sound recording 

copyright owner has the right to demand a payment higher than any service could pay, there 

cannot be said to be any true functioning market. By framing the ratemakings through the tried44 See False Premises. False Promises, Future of Music Coalition (Dec. 13,2006), 

hllp:11 fUlureoJinusic .orgl arlicIe/research/faIse-premiscs-faIse-promiscs. 

45 S'ee Jim Ayre, FMC on Payola and Localism_ FUTURE OF MUSIC COALITION (June 16,2008), 

hllp:! IfulureoJinusic _org/blog/2 008/061 l6/fmc-pay ola-and -localism 

16 
259 

and-true § 801 (b) standard, IRF A will encourage the growth of online music, to the benefit of 

both consumers and artists. 

17 
260 

APPENDIX 

The History of Online Radio Royalties 

The law governing sound recording transmission royalties is currently a patchwork of 

rules that were written at different times and supported by different influential industry lobbies. 

It is thus necessary to review the history of the online radio royalties to understand how the 

Congress arrived at the standard it uses today, and how the Copyright Royalty Board (CRB) 

interprets that standard. 

Until relatively recently, sound recordings did not receive federal copyright protection at 

all. In 1971, the Sound Recordings Act created copyright protection for sound recordings, but 

only granted the rights to control reproduction and distribution of sound recordings46 

In 1995, the Digital Performance Right on Sound Recordings Act47 ("DPRA") granted a 

public performance right in sound recordings that applied only to digital audio transmissions. 

The law also gives exemptions from this right for terrestrial broadcasts licensed by the Federal 

Communications Commission, certain retransmissions of those broadcasts, and certain other 

transmissions. 4x Notably, the DPRA exempted many web casters from royalties entirely by 

exempting noninteractive nonsubscription services49 

The DPRA also created a new statutory license under which non-exempt, noninteractive 

online music services could use sound recordings for their online radio services 50 The DPRA 

called for this compulsory license to be set according to the standard set in section 80 I (b) of the 

Copyright Act." 

The decision to create a right for digital transmission but exempt AM/FM radio was in 

part based on the fear that digital music services would supplant sales of recorded music sales, 

both for singles and for full albums.'2 Digital music services caused apprehension that the music 

streaming services would change the entire structure of recorded music consumption, from an 

ownership model to an access model. The recorded music industry also worried that digital 

technology would move control over where and how listeners accessed recorded music from the 

incumbent companies to the users themselves, and would enable listeners to copy and distribute 

music streams. The exemption of AIvVFM radio from this new performance right can also in part 

be attributed to the influence of groups like the National Association of Broadcasters, which 

4<i Sound Recording Act of 1971, Pub. L. 92-140. 85 Stat. 391 (1971). 

47 Pub. L. No. 104-39. 109 Stat. 336 (1995). 

48 17 US.c. §§ 114(d), (j). 

49 Digilal Performance Righl in Sound Recordings Acl of 1995, Pub. L. No. 104-39, 109 Slal. 336 (1995). 

50 17 US.c. § 114(f). 

51 17 US.c. § 80 I(b)( I) This standard pre-existed the DPRA, and was already being used to detennine 

the rates for a compulsory license to reproduce and distribute sound recordings. See 17 U.s.c. § 115. 

52 S. Comm. on the Judiciary, I04th Cong .. Digital Perfonnance Right in Sound Recordings Act of 1995, 

S. Rep. No. 104-128, at 14 (statements by Sen. Hatch) C'lCJurrent copyright law is inadequate to. 

prolecllhe livelihoods of the recording arlisls ... who depend upon revenues derived fromlradilional 

record sales."). 

18 
261 

argued that terrestrial radio only promoted sales and did not threaten the status quo of the 

industry53 

Then, in 1998, the Digital Millennium Copyright Act'" ("DMCA") divided online radio 

services into Internet, satellite, and cable services, and applied a different royalty standard to 

each." The DMCA required noninteractive nonsubscription web casters to pay a license for the 

first time, creating the category of an "eligible nonsubscription service.,,'6 After the DMCA was 

passed, web casters and the major record labels could not agree on the appropriate licensing rates, 

so a Copyright Arbitration Royalty Panel recommended a rate under the willing buyer/willing 

seller standard 57 The Librarian of Congress then adjusted the recommended rate and issued a 

final rate 58 

In 2001 and 2002, the Copyright Arbitration Royalty Board convened the first 

web casting ratemaking.'" Notably, small web casters were largely absent from this proceeding, 

perhaps due to the requirement that participants to the proceeding pay a portion of the 

arbitrators' fees. One major issue of contention in this proceeding was the choice between 

structuring the fee as a percentage of revenue and a flat per-use fee. The RIAA argued for a peruse fee, what small web casters could participate argued for a percentage of revenue, and the 

Digital Media Association purposed a combination."o The CARP ultimately relied on a previous 

agreement between Yahoo! (which at the time was operating an online radio service that has 

since gone out of business) and the RIAA, and settled on a per-use fee."l Many web casters 

objected that the Yahoo! and RIAA settlement was an inappropriate model because Yahoo! had 

accepted a higher fee for online-only transmissions in return for lower radio retransmission rates, 

which was the bulk of Yahoo! online radio business at the time. Online-only webcasters were 

therefore stuck with high rates without being able to benefit from the discounted retransmission 

rates. 

'1 See The Performance Rights Act: Hearing on H.R. 848 Before the H. Comm. on the Judiciary, Illth 

Congo (2009) (statement of Steven Newberry, Commonwealth Broadcasting Corporation, On Behalf of 

the National Association of Broadcasters). 

54 Pub. L No. 105-304, 112 Stat 2860 (1998) 

55 17 U.S.c. § 114. 

56 17 U.S.c. § 114(j). 

57 66 Fed. Reg. 141. 38324-38326 (July 23, 2002). 

58 Order, Digital Performance Right in Sound Recordings and Ephemeral Recordings (May 21, 2002), 

http://www.copyrighl.gov/carp/webcasling-rales-order.hlml; Delenninalion of Reasonable Rales and 

Terms for the Digital Performance of Sound Recordings and Ephemeral Recordings, 67 Fed. Reg. 130, 

45239-45276 (July 8,2002). 

" See Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings 

and Ephemcral Recordings, 67 Fed. Reg. 45,240 (2002) (codified at37 C.F.R. pl. 261). 

0<) Delennination ofReasonablc Rales and Terms for the Digital Perfonmmce of Sound Recordings and 

Ephemeral Recordings, 67 Fed. Reg. 45,240 (2002) (codified at 37 C.F.R. pt 261) at 45,241-42. 

61 Id. at 42,250. 

19 
262 

The Librarian OfCOllgre5S ultimately accepted the CARP's ruclllring of the royalti~s, 

but rcjKted the actual mil'S as too high, and adjust~d the rates downward ·' However, this 

dl'Cision was eventually panially superseded by the Small Webcaster Senlement Act 0[2002,·) 

under which the panics re-ncgoliMed II percentage ofreyenue-based fee for $mal1 and 

noocommercial webca~1ers 

In 2004, Congress enacted the Copyright Royalty and Di~tribution Refonn Act of2oo4, 

whIch replac.m th .. CA RP syM .. m with the 

Copyright ROYHlty Boord (CRn)," In 2007, the 

CRR .set the online mdio compulsory !icen.se 

through 2010 01 In this mlemaking. the-CRB 

fnllowed SoundExchangc'5 request 10 discwnt 

rates in the 'interactive music streaming market 

to approximate market rates for nonintl'rlIct;vc 

5treal1ting."" After public OUtcry objecting that 

the- rates were too high for webcasters 10 QpCTate 

a sustaioablc business, Congre.n enacted two 

pieces of legislation intended to encourage 

settlemenls belwccolhe wcbcaslers and 

copyright ownen 6

' 

21HI~ ( lUI f{,tt l1lnl.ml: t"~Utl nUnI11111111) 

V .. IW,rIlW per DiJlj.ca1 

t~ 

2006 SO 000' 

2007 $00011 

2008 SO.00 14 

2009 somis 

2010 500019 

By 2009, many webcllSlc('!; had negOlialed settlements wilh Sound Exchange pursuam 10 

the Webc-ll~!erSe\1lemen l Acts, induding Ihe PurePlay Agreement, through which a majorilY of 

w~bC4stl.'fO pay their royalties through :WI5 ~ The l'llrePlay Agreement lowered the CRIl rales 

by as much a~ 40% in return for greater reponing fl"quirCnlents, leadin.!! some weOcasters to 

announce thai th~ cwld now continue to openll!! for the near future, Me"dllwhile, terrestrial 

radiO eaml'd $1b 5 billion in profIts, bUI paid $0 in sound recording royaJties ~ 

Ii: Jd. al 45.255. 45,272. 

oJ Small Wcbcasl~r Seulcmenl Act of2002. Pub. L, No. 107·321, ~ J. 11 6 SI31 17~0. 2731 (suspouding 

pnvmctHs under CARP IlIlc. III f3\ of.ubscqucnll~ ""h'<llinICd Il.!!rccmcnt), 

.. COP) righl ROl-' ah ' and Dislnbl1llOn Rdonn ACI of 2~, H, R. 1417. 10$lh Cong .. lSI Scss, (2003) . 

., Dlgnall'erii:mllanc" Right LIl Sound Recordings aM Ephemeral Rccon:ls. 11 Fed. Reg. 14,O~./. 1./,1)&11 

(Mar I. 20(7) (~odif,cd.1 37 C.F.R. pI. 3HO) 

60 D,g,tal PcrfOll11ancc RighI "I Sonnd Rccordings and Ephemeral RccOfding$.. 72 Foo Reg, OU IMa) 

1, 2(07) (codilic.:l at 37 C.F.R. pI, 380) nt 24,09I·'l~ , 

~ Wcbc.sler Sculcolcnl Act of2008, H. It 7n8~, IIUIh Cons , 2d Scss. (200M); Wcbc'~lcr Sculcruc"l 

Acl of 1009. S. ! I~~, 111~1 CO"g., lSI Sc", 1200'J) . 

.. NOtLlicJliou of Asn:ctl\ctl15lJndcf the Webca~ler Scllkmcnt ACI ofl0()9. 74 Fed, Reg. IJ(>. 347% 

(Jul~ 17, 200')) . 

.. "h~ }'f!rj(>m",m'l' Hlgh/s A~/ tllld I'ar;/J' '''''''''.': MII$lc 1)10/"",), I'layt>T""'" Hoorill$ Q/I S, J71J 8~jQ", 

Ihe S. r"",,,,. U/I /h~ .h,rJic"",., I Illh Cons. t2()(K1) (SClleoncnl of Rober! K ;,nb.,II, E~l'i:Uli\ c Vice 

I'Tc.,dcnt for C"rpora!c !)c'Clopnlcnl II: General Counsel, ReoINci"orh, Int.). 

hUp:lljudiciary .,;e n~l<! 1I0\Ihearing"tc~limon cfm id 4(11 I &wit jd=8 164. 

20 
263 

The PurePla)' Agreement created II schedul e of rate5. tenns. and condition~ for all 

commercially available sound reoording:; through 201 S, to which any eligible wcbea.H:r can opt· 

in If they choo~e to do so, commercial webcasters must agree to withd raw from any ratcmakings 

before Ihe CRJ ~ and nOI panicipale ill any ntlemakings while the PurePl ay agreement is in drecl 

The l'urePl av Agreement contains three r~te classes, b~sed on _gross revenut'S and streaming 

capabilities. '" 

( I.", t 1021111111' 1(.111 '1""11111111 

Rrqll'rrlnrm, ." 

La rge fommtrfial > $1 .25 million 811nual The grea ter of. 2SoA ofU $, $25,000 per 

bca ltrS re,'cnucs revenues; or per p;,rfonnane<: year 

IlIte 40% lower than CRll's 

set rate (see below) 

$ IIIMIl cQlllmerci,,1 $1 25 miHion8nouai The greater of 12% of their 

wellcaurrs revenues. must place first S250J)OO in rNeou/: and 

cap 00 the number of 14% of revenue above 

!IOUnd recordings they S2S0.000: Of 7% of expenses 

play 

" 'ebusters providing Same os those Bgreed to by 

bundled, sy dic~l ed , the NAB' 

or \lb ~ri )liop 

SfI"\';CC$ ,-

.. = 

2012 

-

SO 0020 

2013 SO 0022 

20!4 $0,0023 

20 15 SO,(102S 

In return for the discounted raIl'S, the PurePlay Agreement requires more Slrin!!;enl 

reponing requirements for the webcas er~ to give more detailed censu~ r"'pullS to 

Sound Exchange. 

The market has mosl recently begun to see private direct deals Ihat bundle payments for 

nlin ~dio with terrestrial broadc<l,li ng, For example. in 2012. Clear Channel and Big Machine 

Re-cords agree tQ a dea! that encompassed both digital licensing and terrestrial broadca ~n!l. even 

though the terrestrial sound recording righ t has never been made law." 

'" NotHicDhOO of A~n:eml:llt s Under lIIc WCbcOSLC' S\:lIleml:llt ACl of 20tH I. 74 Fed. Reg 40. 92\13·9'1 

(MOT, 3. lOOn 

'I CkarCh~"nel.lIlg lXh'-,,~ I (lb~1 (;'Imp ,,<III Cit,,, Chlll",~1 A"'lOtI~c~ (:,,,,,,,rlhN'lIklllg Agrr(Itl""' III 

f;",.,b!c H""IrilCon>p<!ny ""d 11. Arti,./J It) 'I,"'(iflm~ In All Rod,;, H,'W~,,~ 5', .... "',,, ""d Aad.'MI,· 

Groll'ln '1/)ixf/a/ Radio, 

ZI 
264 

f 

Ya , 

2012 

20n 

2014 

2015 

( 1t1l1t.1I~' 

RQwIMy'Jl«"DlaiIlf ~-. 

$00011 

$0,0012 

SO 0013 

SO,OOl4 

Unlik~ the compulsory licen~, 

howe"er, 1noch about the Clear 

Channel/Big Machine deal remains a 

mystery The neSOIinting.process was nOi 

public. oor are the !!Xl\C1 tern,s orlhe deal 

Rumors indicate tlmt the deal ma), split 

royalties between record labels and animo 

but without transparellCY tIlis is difficult to 

confl rm, and even if true the roy~lti(!l; may 

be subjec1 to Ihe record label accoun!in~ 

process or e,ven w;thheJd uniilthe record label concludes it has broken ev!!n on the album All of' 

these mechanisms for record labelS to decrease the royahies that go dircctly to theani51S ure 

avoided under t)ll'COIllpul501)' license process, which ensures that Ii lfansparent split is 

distributed dir~'C ly to soond r~eording owner and the p~rf()fmjr\g artins, 

hUp:l!"'''''' cle;,n:h"nneLcomlMedi.AndEnwrtainmtnVP1"C5SRelc3SC "~p~' Press Rclea!ie 1 Dz3107. 
265 

Future of Music Coalition ,,, ,,' ... 

House SUbCill\1Mineeon Intellectual Property, 

Competition Policy and the Internet 

2138 Rayburn Onice Building 

Washington. DC 205 15 

November 28, 2012 

" 

DearCllairman Goodlane, Congressman Quayle and members of IIII' committee: 

Future of Music Coalition respectfully submits this wrinen testimony for consideration in 

advance of the commillee's November 28. 2012 hearing "Music Licensing. Par1 I" , 

Future of Music Coalition (FMC) is a 1131ionaJ non-profit educ~(ion, rest'~rch and 

ad\'ocacy organization l1\al idt'ntilie~. cxamin(.'s aud Inlllslatcs Ihe challenging issues al 

the inlerseclioll of IllUsic, law, technology aud policy. FMC achieves this through 

continuous intcrac\iufl with ils primary cOllstituency - musicians - ~l1d ill collaburatiou 

with other cremor/citizcm groups_ 

For more than a dl'Cade, we- ha\'e observed changes to traditional industry business 

models, and sought to infonn at1ists about what these changes could mean for anists' 

ability to reach audiences and grow their careers. Over our Iwelve year hislory. we have 

participated in a number of webcaslins-related matters. from the early CARP royalty 

hearings. to the formation of SoundE.~chanl:!t:. to the debates about internet royally rates 

and reporting requirements Our testimony submitted 10 both chambers of Congress (in 

2002 and 2007, respectively) urges stakeholders to work together 10 strike a balance Ihat 

recognizes the value of webcaSlins 10 creators and listeners. but also properly 
266 

Testimony of Future of Music Coalition November 28,2012 

compensates performers and labels for uses of their work. I_Many things have changed 

since those early days of online broadcasting, Over the past ten years, internet and digital 

radio has evolved into a robust and viable business. Services like Pandora, Sirius XM, 

Clear Channel's IHeartRadio and Slacker are leading the way in deli vering radio-like 

services to millions of music fans every day, and paying millions of dollars in digital 

performance royalties to rightsholders, performers and songwriters. 

But as these businesses have grown, the initial licensing procedures - as outlined by the 

Digital Performance in Sound Recordings Act of 1995 and the Digital Millennium 

Copyright Act of 1998 - have become a point of contention. Pureplay2 web caster 

Pandora's royalty bills are based on a per-user, per-stream rate (with a percentage of 

revenue option that would likely be higher). Meaning, they owe a fraction of a penny for 

every user, and every stream, the consequence being that as the business grows, so do the 

costs. Pandora, which states that 50 percent of its gross revenue goes to rightsholders, 

says that this calculation is unfair - especially when compared with satellite radio's rate 

of eight percent of gross revenue. Pandora says that the ditlerences in rates are 

unsustainable going forward. 

Currently, there are competing bills that address the issue of radio parity in ditlerent 

ways. 

The Internet Radio Fairness Act, introduced by Jason Chaffetz (R-UT) on July 20, 

2012, seeks to aboli sh the current rate-setting standard for webcasters Ii ke Pandora. The 

bill proposes, instead, to calculate the royalty based on a percentage of the webcaster's 

gross revenue. Essentially, Pandora and other pureplay webcasters would simply pay a 

I Future of Music Coalition testimony before the Senate Judiciary Committee. May 15.2002 

llWZ [ulJ1r@iil1u§ic,or£1ilillgLco p..uigil1cX9y<ll!.i.c§:}\hc:rj:-=Liglll :"RQl::dillb,c;l)f1h~li!lg 

Future of Music Coalition testimony before the House Small Business Committee, June 27, 2007 

htljlj/fimlf_C()Jrll~,i ",,-org!.f!lillg1f1l1~:tc;;tinl()I1Y:SU bll.ri1tC(l:bol~<;:sm <illJ,usin CSS:<:Qll1nlilli'<;cc 

'Ig Qfi1S!i11g:1ll1"l' 

2 A webcaster whose primary business is to transmit sOlmd recordings under the statutory license, 

and not to sell or promote any other service or product 

2 
267 

Testimony of Future of Music Coalition November 28,2012 

percentage of gross revenue, similar to how satellite radio's rates are calculated. Critics 

of the bill say that this will lead to a substantial decline in revenue for artists. 

On August 20th, Jerrold Nadler (D-NY) offered a different vision with the Interim 

Fairness in Radio Starting Today Act (Interim FIRST). The bill would put cable and 

satellite radio services on the same royalty-setting standard as pureplay internet radio. 

That would make cable and satellite radio stations pay higher royalty fees to musicians. 

Nadler's bill also calls out the one platfonn that does not compensate performers and 

sound recording copyright owners for their music - broadcast radio. Interim FIRST 

would also compel over-the-air broadcasters to compensate performing artists, albeit 

through a stopgap measure that involves raising the rates for terrestrial stations' digital 

simulcasts to make up for what they aren't paying for over-the-air plays. Unfortunately, 

Interim FIRST would not collect money owed to US performers for international plays. 

In a tough economic climate for domestic artists, this can only be seen as a partial 

solution, at best. 

Both pieces of legislation are problematic, but in different ways. The IRF A bill, while 

attempting to create rate parity among large pureplay web casters and satellite radio, 

would likely do so by lowering the amount that pureplay web casters need to pay 

musicians and copyright owners, by a considerable degree. IRFA also doesn't address the 

lack of a public performance royalty for sound recordings for terrestrial radio airplay -

the most egregious loophole in regards to "parity" out there. 

Another point of contention: Section 5 of IRFA contains language that could put 

limitations on the ability for artists (or their collective representatives) to speak publicly 

or otherwise advocate for compulsory licenses over direct deals3 The bill invokes the 

anti-monopoly provisions in the Sherman Act as justification for these restrictions. This 

is troubling, as collective management bodies - such as PROs, unions and 

3 "Muzzling Free Speech ely Aliists: IRc'A Section 5 Analysis," Ihe Trichordist, Novemher g, 2012 

http://Uleirichordist. com/tag/sherman -acll 

3 
268 

Testimony of Future of Music Coalition November 28,2012 

SoundExchange - offer important leverage to musicians and performers who otherwise 

lack input into rate-setting and other royalty negotiations, 

Interim FIRST attempts to tackle the terrestrial radio exemption, but instead of 

confronting the problem head on and simply legislating that terrestrial stations must pay 

public performance royalty for sound recordings, the bill simply raises the rates on the 

digital part of the business to compensate for this gaping hole in rights. Traditional 

terrestrial airplay is still hugely important, and consistent airplay generates significant 

royalties for songwriters and publishers. A real attempt at parity would include the 

establishment of the public performance royalty for sound recordings for terrestrial 

airplay. 

It is common for stakeholders to suggest legislative fixes that have a favorable outcome 

for their position. Typically, opponents characterize such proposals as extreme and 

unworkable, and then offer suggestions that meet their own needs. But this back and forth 

process gives all stakeholders room to negotiate and compromise on legislation that could 

achieve more reasonable middle ground. 

FMC endorses seven core points that musicians and advocates must defend in the 

upcoming fights, no matter what the outcome: 

1. Musicians and songwriters are stakeholders in these debates. Airplay on 

terrestrial, satellite and internet radio are an important part of musicians' careers, 

not only for exposure, but also as a revenue stream via royalties paid by their PRO 

and/or SoundExchange. Musicians cannot just be the unwitting victims at the tail 

end of this process. Policymakers MUST include a variety of musicians and 

songwriters in these ongoing conversations. 

2. Rate-setting should be reasonably platform neutral. Although business models 

and competition should be factored into any rate-setting scheme, we believe that 

no single technology should be penalized and no platform should be exempted 

4 
269 

Testimony of Future of Music Coalition November 28,2012 

from compensation obligations. Even if rate-setting standards are harmonized, 

rates may still ditler based on unique market factors. 

3. Direct payments to performers must be preserved. Direct payment to 

musicians for digital performances - as represented by SoundExchange's direct 

and simultaneous payments to performers and sound recording copyright owners 

- is a major advancement in fair and transparent artist compensation. It is 

important that the direct payment process not be whittled away in the pursuit of 

bargain-basement licensing deals. Any proposed legislation should include 

provisions to ensure direct, non-recoupable payment to artists - even under direct 

licensing agreements. 

4. Rates should balance the growth of new technologies with fair compensation 

for creators. It may be necessary to examine whether emerging radio 

technologies are able to compete against already established services. However, 

expansion must not be subsidized on the backs of creators who are the reason this 

marketplace exists in the first place. We recognize this is a difficult balance to 

strike, but it is a crucial one for all stakeholders. And the balance is impossible to 

achieve with the continued exemption for terrestrial broadcasters. 

5. Musicians' rights to bargain and advocate collectively must be defended. 

Without the leverage offered by collective management bodies, musicians and 

songwriters lack input in the process of royalty negotiation. Anti-trust law must 

never be abused to prevent artists from speaking up for their collective best 

interests. 

Beyond the goals of any legislative efforts to address the rate-setting standards, FMC also 

encourages web casters and digital music providers to embrace business practices that: 

6. Make it easy for listeners to discover and take action. One of digital radio's 

greatest assets is its ability to foster music discovery. On many services, web cast 

tracks are coupled with "buy now" buttons that redirect listeners to iTunes and/or 

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Testimony of Future of Music Coalition November 28,2012 

Amazon for song purchases. But there's more opportunity. Webcasters can help 

listeners to take action on their discoveries by displaying producer, songwriter and 

player credits, and connect to artists' web sites or social media, or learn about 

upcoming performances. 

7. Recognize the power of data. Web casters like Pandora have something that 

terrestrial broadcasters can never offer, and that's accurate data about what music 

is being streamed, how often, and by whom. Not only is this good for the accurate 

payment of royalties to a huge swath of musicians (many of whom have never 

seen royalties for traditional airplay), it could also be a new way for artists to 

leverage other sources of revenue. Giving musicians and their managers access to 

data about listener engagement could provide musicians with the tools to 

efficiently route tours, promote new releases, build closer connections with 

audiences, and offer higher-priced items to dedicated fans. Access to data should 

not be traded for lowered digital performance royalties, but we encourage 

musicians to explore the options, and for web casters to give musicians access to 

play data to increase the value of their streams and forge mutually beneficial 

partnerships with the music community. 

FMC remains committed to advocating for the fair compensation for musicians and 

creators. We offer our organization as a resource in any negotiations and encourage 

policymakers to include musicians in these important conversations. 

Casey Rae 

Deputy Director 

Future of Music Coalition 

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