[Federal Register Volume 72, Number 83 (Tuesday, May 1, 2007)]
[Rules and Regulations]
[Pages 24084-24114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-8128]



[[Page 24083]]

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Part VI





Library of Congress





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Copyright Royalty Board



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37 CFR Part 380



 Digital Performance Right in Sound Recordings and Ephemeral 
Recordings; Final Rule

Federal Register / Vol. 72, No. 83 / Tuesday May 1, 2007 / Rules and 
Regulations

[[Page 24084]]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 380

[Docket No. 2005-1 CRB DTRA]


Digital Performance Right in Sound Recordings and Ephemeral 
Recordings

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Copyright Royalty Judges, on behalf of the Copyright 
Royalty Board of the Library of Congress, are announcing their final 
determination of the rates and terms for two statutory licenses, 
permitting certain digital performances of sound recordings and the 
making of ephemeral recordings, for the period beginning January 1, 
2006, and ending on December 31, 2010.

DATES: Effective date: May 1, 2007.
    Applicability date: The regulations apply to the license period 
January 1, 2006 through December 31, 2010.

ADDRESSES: The final determination is also posted on the Copyright 
Royalty Board Web site at http://www.loc.gov/crb/proceedings/2005-1/final-rates-terms2005-1.pdf.

FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or 
Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658. Telefax: 
(202) 252-3423.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Subject of the Proceeding

    This is a rate determination proceeding convened under 17 U.S.C. 
803(b) et seq. and 37 CFR 351 et seq., in accord with the Copyright 
Royalty Judges' Notice announcing commencement of proceeding, with a 
request for Petitions to Participate in a proceeding to determine the 
rates and terms for a digital public performance of sound recordings by 
means of an eligible nonsubscription transmission or a transmission 
made by a new subscription service under section 114 of the Copyright 
Act, as amended by the Digital Millennium Copyright Act (``DMCA''), and 
for the making of ephemeral copies in furtherance of these digital 
public performances under section 112, as created by the DMCA, 
published at 70 FR 7970 (February 16, 2005). The rates and terms set in 
this proceeding apply to the period of January 1, 2006 through December 
31, 2010. 17 U.S.C. 804(b)(3)(A).

B. Parties to the Proceeding

    The parties to this proceeding are: (i) Digital Media Association 
and certain of its member companies that participated in this 
proceeding, namely: America Online, Inc. (``AOL''), Yahoo!, Inc. 
(``Yahoo!''), Microsoft, Inc. (``Microsoft''), and Live365, Inc. 
(``Live365'') (collectively referred to as ``DiMA''); (ii) ``Radio 
Broadcasters'' (this designation was adopted by the parties): namely, 
Bonneville International Corp., Clear Channel Communications, Inc., 
National Religious Broadcasters Music License Committee (``NRBMLC''), 
Susquehanna Radio Corp.; (iii) SBR Creative Media, Inc. (``SBR'') and 
the ``Small Commercial Webcasters'' (this designation was adopted by 
the parties): namely, AccuRadio, LLC, Digitally Imported, Inc., 
Radioio.com LLC, Discombobulated, LLC, 3WK, LLC, Radio Paradise, Inc.; 
(iv) National Public Radio, Inc. (``NPR''), Corporation for Public 
Broadcasting-Qualified Stations (``CPB''), National Religious 
Broadcasters Noncommercial Music License Committee (``NRBNMLC''), 
Collegiate Broadcasters, Inc. (``CBI''), Intercollegiate Broadcasting 
System, Inc., (``IBS''), and Harvard Radio Broadcasting, Inc. 
(``WHRB''); (v) Royalty Logic, Inc. (``RLI''); and (vi) SoundExchange, 
Inc. (``SoundExchange'').
    DiMA, Radio Broadcasters, Small Commercial Webcasters, SBR, NPR, 
CPB, NRBNMLC, CBI, IBS and WHRB are sometimes referred to collectively 
as ``the Services.'' The Services are Internet webcasters or broadcast 
radio simulcasters that each employ a technology known as streaming, 
but comprise a range of different business models and music 
programming. DiMA and certain of its member companies that participated 
in the proceeding (namely: AOL, Yahoo!, Microsoft and Live365), Radio 
Broadcasters, SBR and Small Commercial Webcasters are sometimes 
referred to collectively as ``Commercial Webcasters.'' NPR, CPB, 
NRBNMLC, CBI, IBS and WHRB are sometimes referred to collectively as 
``Noncommercial Webcasters.''

II. The Proceedings

A. Pre-Hearing Proceedings

    A notice calling for the filing of Petitions to Participate in this 
proceeding to set the rates and terms for the period beginning January 
1, 2006, and ending on December 31, 2010, was published February 16, 
2005. 70 FR 7970. The Petitions were due by March 18, 2005. Forty-two 
petitions were filed. Following an order to file a Notice of Intention 
to Submit Written Direct Statements, the participants were reduced to 
the following twenty eight: SBR; NPR; NPR Member Stations; CPB; CBI; 
SoundExchange; RLI; IBS; WHRB; Digital Media Association; AOL; Live365; 
Microsoft; Yahoo!; AccuRadio LLC; Discombobulated LLC; Digitally 
Imported, Inc.; Radioio.com LLC; Radio Paradise, Inc.; Educational 
Media Foundation; NRBNMLC; Bonneville International Corp.; Clear 
Channel Communications, Inc.; CBS Radio, Inc.; NRBMLC; Salem 
Communications Corp.; Susquehanna Radio Corp.; and Beethoven.com LLC.
    Following an unsuccessful negotiation period, the Written Direct 
Statements were due October 31, 2005. All of the above filed plus the 
additional following: Mvyradio.com LLC; 3WK; XM Satellite Radio, Inc.; 
Sirius Satellite, Inc.; Infinity Broadcasting Corp.

B. The Direct Cases

    The participants conducted discovery and then began live testimony. 
By the time testimony began, the participants reduced to the following: 
SBR; NPR; NPR Member Stations; CPB; CBI; SoundExchange; RLI; IBS; WHRB; 
Digital Media Association; AOL; Yahoo!; AccuRadio LLC; Discombobulated 
LLC; Digitally Imported, Inc.; Mvyradio.com LLC; Radioio.com LLC; Radio 
Paradise, Inc.; 3WK LLC; Educational Media Foundation; NRBNMLC; 
Bonneville International Corp.; Clear Channel Communications, Inc.; 
NRBMLC; and Susquehanna Radio Corp.
    Testimony was taken from May 1, 2005, through August 7, 2006. 
SoundExchange presented the testimony of the following 14 witnesses: 
(1) John Simson, SoundExchange, executive director; (2) Barrie Kessler, 
SoundExchange, chief operating officer; (3) James Griffin, One House 
LLC, chief executive officer; (4) Erik Brynjolfsson, MIT Sloan School 
of Management, professor of management and director of Center for 
eBusiness at MIT; (5) Michael Pelcovits, MiCRA, economic consultant; 
(6) Mark Eisenberg, SONY BMG, senior vice president of business and 
legal affairs; (7) Lawrence Kenswil, Universal eLabs, a division of 
Universal Music Group, president; (8) Michael Kushner, Atlantic Records 
Group, business and legal affairs; (9) Stephen Bryan, Warner Music 
Group, vice president of strategic planning and business development; 
(10) Harold Bradley, American Federation of Musicians of United States 
and Canada, vice president; (11) Jonatha Brooke, songwriter and 
performer, owner of Bad Dog Records; (12) Cathy Fink, songwriter and 
performer; (13) Bruce Iglauer, Alligator

[[Page 24085]]

Records, an independent blues label, founder; and (14) Mark Ghuneim, 
Wiredset, LLC, chief executive officer.
    Royalty Logic, Inc. presented the testimony of Ronald A. Gertz, 
president.
    The Services presented the testimony of the following 24 witnesses: 
Digital Media Association and its Member Companies: (1) Adam B. Jaffe, 
Brandeis University, professor in economics; (2) Christine Winston, 
America Online, executive director of programming strategy and 
planning; (3) David Porter, Live365, general manager of business 
development; (4) Jonathan Potter, DiMA, executive director; (5) N. Mark 
Lam, Live365, chairman and chief executive officer; (6) Robert D. 
Roback, Yahoo! Music, general manager; (7) J. Donald Fancher, Deloitte 
and Touche Financial Advisory Services LLP; (8) Jay Frank, Yahoo!, 
programming and label relations; (9) Fred Silber, Microsoft, business 
development manager for MSN; (10) Eric Ronning, Ronning Lipset Radio; 
(11) Jack Isquith, American Online Music, executive director Music 
Industry Relations; (12) Karyn Ulman, Music Reports, Inc.;
    Radio Broadcasters: (13) Dan Halyburton, Susquehanna Radio, 
research, engineering and programming; (14) Roger Coryell, San 
Francisco Bonneville Radio Group, director strategic marketing and 
Internet; (15) Russell Hauth, National Radio Broadcasters Music 
Licensing Committee, executive director; (16) Brian Parsons, Clear 
Channel Radio, vice president of technology;
    Small Commercial Webcasters: (17) Kurt Hanson, AccuRadio, president 
and RAIN newsletter, publisher;
    National Public Radio: (18) Kenneth Stern, NPR, chief executive 
officer;
    Intercollegiate Broadcasting System, Inc. and Harvard Radio 
Broadcasting Co., Inc.: (19) Frederick J. Kass, Jr., IBS, chief 
operating officer; (20) Michael Papish, HRBC, treasurer and Media 
Unbound, president;
    Collegiate Broadcasters, Inc.: (21) William Robedee, CBI, past 
chair and KTRU, Rice University, manager; (22) Joel R. Willer, KXUL, 
University of Louisiana, Monroe, faculty advisor;
    National Religious Broadcasters Noncommercial Music Licensing 
Committee: (23) Eric Johnson, NRBNMLC, board member and CDR Radio 
Network, music director; and
    SBR Creative Media, Inc.: (24) David Rahn, president.

C. The Rebuttal Cases

    The participants filed Written Rebuttal Statements on September 29, 
2006. Discovery was then conducted on the rebuttal evidence. Rebuttal 
testimony was taken from November 6 through November 30, 2006.
    SoundExchange presented the testimony of the following nine 
witnesses: (1) Barrie Kessler, SoundExchange, chief operating officer; 
(2) James Griffin, One House LLC, chief executive officer; (3) Erik 
Brynjolfsson, MIT Sloan School of Management, professor of management 
and director of Center for eBusiness at MIT; (4) Michael Pelcovits, 
MiCRA, economic consultant; (5) Mark Eisenberg, SONY BMG, senior vice 
president of business and legal affairs; (6) Thomas Lee, American 
Federation of Musicians, president; (7) Simon Wheeler, Association of 
Independent Music, chair of New Media Committee; (8) Charles Ciongoli, 
Universal Music Group, North American, executive vice president and 
chief financial officer; and (9) Tom Rowland, Universal Music 
Enterprises, senior vice president, film and television music;
    Royalty Logic, Inc. presented the testimony of the following two 
witnesses: (1) Ronald A. Gertz, president; and (2) Peter Paterno, 
entertainment attorney;
    The Services presented the testimony of the following 16 witnesses:
    Digital Media Association and its Member Companies: (1) Adam B. 
Jaffe, Brandeis University, professor in economics; (2) Christine 
Winston, America Online, executive director of programming strategy and 
planning; (3) N. Mark Lam, Live365, chairman and chief executive 
officer; (4) Robert D. Roback, Yahoo! Music, general manager; (5) J. 
Donald Fancher, Deloitte and Touche Financial Advisory Services LLP; 
(6) Jay Frank, Yahoo!, programming and label relations; (7) Jack 
Isquith, American Online Music, executive director Music Industry 
Relations; (8) Roger James Nebel, FTI Consulting;
    Radio Broadcasters: (9) Keith Meehan, Radio Music Licensing 
Committee, executive director; (10) Eugene Levin, Radio Music Licensing 
Committee, controller; (11) Brian Parsons, Clear Channel Radio, vice 
president of technology; (12) Adam B. Jaffe, Brandeis University, 
professor of economics;
    National Public Radio: (13) Adam B. Jaffe, Brandeis University, 
professor of economics;
    Intercollegiate Broadcasting System, Inc. and Harvard Radio 
Broadcasting Co., Inc.: (14) Jerome Picard, economics professor (ret.); 
(15) Michael Papish, HRBC, treasurer; and
    National Religious Broadcasters Noncommercial Music Licensing 
Committee: (16) Eric Johnson, member of board.
    At the close of all the evidence, the record was closed. In 
addition to the written direct statements and written rebuttal 
statements, the Copyright Royalty Judges heard 48 days of testimony, 
which filled 13,288 pages of transcript, and 192 exhibits were 
admitted. The docket contains 475 entries of pleadings, motions and 
orders.

D. Post-Hearing Submissions and Arguments

    After the evidentiary phase of the proceeding, the participants 
were ordered to file Proposed Findings of Fact and Conclusions of Law 
on December 12, 2006, and Responses to those proposals on December 15, 
2006. The parties were also ordered to submit Stipulated Terms on 
December 15, 2006, but none have been filed. Closing arguments were 
heard on December 21, 2006. Then the matter was submitted to the 
Copyright Royalty Judges for a Determination.\1\
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    \1\ Hereinafter, references to written direct testimony shall be 
cited as ``WDT'' preceded by the last name of the witness and 
followed by the page number. References to written rebuttal 
testimony shall be cited as ``WRT'' preceded by the last name of the 
witness and followed by the page number. References to the 
transcript record shall be cited as ``Tr.'' preceded by the date and 
followed by the page number and the last name of the witness. 
References to proposed findings of fact and conclusions of law shall 
be cited as ``PFF'' or ``PCL,'' respectively, preceded by the name 
of the party that submitted same and followed by the paragraph 
number. References to reply proposed findings of fact and 
conclusions of law shall be cited as ``RFF'' or ``RCL,'' 
respectively, preceded by the name of the party and followed by the 
paragraph number.
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    On March 2, 2007, the Copyright Royalty Judges issued the initial 
Determination of Rates and Terms. Pursuant to 17 U.S.C. 803(c)(2) and 
37 CFR Part 353, the parties filed Motions for Rehearing.\2\ The Judges 
requested the parties to respond to the motions filed, in order to know 
the positions of each party on each of the issues raised in the 
motions, and ordered the parties to file written arguments in support 
of each motion. The parties filed responses and written arguments. 
Having reviewed all motions, written arguments and responses, the 
Judges denied all the motions for rehearing. Order Denying Motions for 
Rehearing, In the Matter of Digital Performance Right in Sound 
Recordings and Ephemeral Recordings, Docket No. 2005-1 CRB DTRA (April 
16, 2007). As reviewed in the said Order, none of the grounds in the 
motions presented the type of exceptional case where the Determination 
is not supported by the

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evidence, is erroneous, is contrary to legal requirements, or justifies 
the introduction of new evidence. 17 U.S.C. 803(c)(2)(A); 37 CFR 353.1 
and 353.2. The motions did not meet the required standards set by 
statute, by regulation and by case law. Nevertheless, the Judges were 
persuaded to clarify two issues raised by the parties. This Final 
Determination includes a transition phase for 2006 and 2007 to use 
Aggregate Tuning Hours (``ATH'') to estimate usage as permitted under 
the prior fee regime. This limited use of an ATH calculation option 
should facilitate a smooth transition to the fee structure adopted in 
this Final Determination. Next, the regulations are corrected to refer 
to ``digital audio transmissions'' in place of the phrase ``Internet 
transmissions.''

III. The Statutory Criteria for Setting Rates and Terms
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    \2\ Motions were filed by DiMA, IBS, WHRB, NPR, Radio 
Broadcasters, RLI, Small Commercial Webcasters, SoundExchange and 
CBI.
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A. The Statutory Background

1. Music Copyright Law in General
    Section 102 of the Copyright Act of 1976 (the ``Copyright Act'') 
identifies various categories of works that are eligible for copyright 
protection. 17 U.S.C. 102. These include ``musical works'' and ``sound 
recordings.'' Id. at 102(2) and 102(7). The term ``musical work'' 
refers to the notes and lyrics of a song, while a ``sound recording'' 
results from ``the fixation of a series of musical, spoken, or other 
sounds.'' Id. at 101. A song that is sung and recorded will constitute 
a sound recording by the entity that records the performance, and a 
musical work by the songwriter. Another performer may record the same 
song and that performance will result in another sound recording, but 
the musical work remains with the songwriter. Under these facts, there 
are two sound recordings and one musical work as a result of the two 
recordings of the same song. Typically, a record label owns the 
copyright in a sound recording and a music publisher owns the copyright 
in a musical work. 5/4/06 Tr. 24:11-27:16 (Simson).
    Under the 1976 Copyright Act, a copyright owner receives a bundle 
of exclusive rights set forth in section 106. 17 U.S.C. 106. Among them 
is the right to make or authorize the performance to the public of a 
copyrighted work. The performance right is granted to all categories of 
copyrighted works with one exception: Sound recordings. Thus, while the 
owner of a musical work enjoys the performance right, the owner of a 
sound recording does not.\3\ Congress did not begin to address this 
inequality until the end of the twentieth century.
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    \3\ Indeed, copyright owners of musical works have enjoyed the 
performance right since the nineteenth century.
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2. The DPRA
    In 1995, Congress enacted the Digital Performance Right in Sound 
Recordings Act (``DPRA''), Public Law 104-39, 109 Stat. 336 (1995), 
which added a new section 106(6) to the Copyright Act. That provision 
grants copyright owners of sound recordings a limited performance right 
to make or authorize the performance of their works ``by means of a 
digital audio transmission.'' 17 U.S.C. 106(6). Often referred to as 
the ``digital performance right,'' the right was further limited by the 
creation of a statutory license for certain nonexempt, noninteractive 
subscription services and preexisting satellite digital audio radio 
services. 17 U.S.C. 114. The statutory license permits these services, 
upon compliance with certain statutory conditions, to make those 
transmissions without obtaining consent from, or having to negotiate 
license fees with, copyright owners of the sound recordings they 
perform. Id. Congress established procedures to facilitate voluntary 
negotiation of rates and terms including a provision authorizing 
copyright owners and services to designate common agents on a 
nonexclusive basis to negotiate licenses--as well as to pay, to 
collect, and to distribute royalties-- and a provision granting 
antitrust immunity for such actions. Id.
    Absent agreement among all the interested parties, the Librarian of 
Congress was directed to convene a Copyright Arbitration Royalty Panel 
(``CARP'') to recommend royalty rates and terms. Congress directed the 
CARP to set a royalty rate for the subscription services' statutory 
license that achieves the policy objectives in section 801(b)(1) of the 
Copyright Act. Id.
    Under the DPRA, copyright owners must allocate one-half of the 
statutory licensing royalties that they receive from the subscription 
services to recording artists. Forty-five percent of these royalties 
must be allocated to featured artists; 2\1/2\ percent of the royalties 
must be distributed by the American Federation of Musicians to non-
featured musicians; and 2\1/2\ percent of the royalties must be 
distributed by the American Federation of Television and Radio Artists 
to non-featured vocalists. 17 U.S.C. 114(g).
3. The DMCA
    The new statutory license for digital audio transmission of sound 
recordings was expanded in the Digital Millennium Copyright Act of 1998 
(``DMCA''), Public Law 105-304, 112 Stat. 2860 (1998). It provided that 
certain digital transmissions and retransmissions, typically referred 
to as webcasting, are subject to the section 106(6) digital performance 
right and that webcasters who transmit/retransmit sound recordings on 
an interactive basis, as defined in section 114(j), must obtain the 
consent of, and negotiate fees with, individual owners of those 
recordings. However, webcasting would be eligible for statutory 
licensing when done on a non-interactive basis. Accordingly, Congress 
created another statutory license in sections 114(d)(2) & (f)(2) for 
``eligible nonsubscription transmissions,'' which include non-
interactive transmissions of sound recordings by webcasters. 17 U.S.C. 
114(d)(2). To qualify for that license, the webcaster must comply with 
several conditions in addition to those that the DPRA applied to 
preexisting subscription and satellite radio services. As with these 
service royalties, webcaster royalties are allocated on a 50-50 basis 
to copyright owners and to performers.
    Congress adopted the DPRA voluntary negotiation and arbitration 
procedures for the DMCA webcaster performance license. 17 U.S.C. 
114(e), (f). However, it changed the statutory standard for determining 
rates and terms. The new standard is to determine what ``most clearly 
represent the rates and terms that would have been negotiated in the 
marketplace between a willing buyer and a willing seller.'' 17 U.S.C. 
114(f)(2)(B).
    Congress also recognized that webcasters who avail themselves of 
the section 114 license may need to make one or more temporary or 
``ephemeral'' copies of a sound recording in order to facilitate the 
transmission of that recording. Accordingly, Congress created a new 
statutory license in section 112(e) for such copies and extended that 
license to services that transmit sound recordings to certain business 
establishments under the section 114(d)(1)(c)(iv) exemption created by 
the DPRA. Congress retained the DPRA voluntary negotiation and 
arbitration procedures for the section 112 ephemeral license. 17 U.S.C. 
112(e)(2), (3). Congress again applied the willing buyer/willing seller 
standard applicable to the section 114 webcaster performance license. 
17 U.S.C. 112(e)(4). The webcasting and

[[Page 24087]]

ephemeral statutory licenses created by the DMCA are the subject of 
this proceeding.
    The two DMCA licenses were the subject of one prior proceeding. 
Determination of Reasonable Rates and Terms for the Digital Performance 
of Sound Recordings and Ephemeral Recordings (Final Rule), 67 FR 45240 
(July 8, 2002) (codified at 37 CFR part 261) (``Webcaster I''). After a 
recommendation from a CARP, the Librarian applied the statutory 
standard to determine rates and terms. Many of the parties in this 
proceeding participated in that prior proceeding.
4. The Reform Act
    Congress enacted a new system to administer copyright royalties 
with the Copyright Royalty and Distribution Reform Act of 2004 (the 
``Reform Act''), Public Law 108-419, 118 Stat. 2341. The Copyright 
Royalty Judges were established to perform the functions previously 
served by the Copyright Royalty Tribunal and the Librarian of Congress. 
They were appointed January 9, 2006, and took over this proceeding.

B. Section 114(f)(2)

1. The Statutory Language
    The criteria for setting rates and terms for the section 114 
webcaster performance license are enunciated under 17 U.S.C. 
114(f)(2)(B), which provides in pertinent part:

    * * * Such rates and terms shall distinguish among the different 
types of eligible nonsubscription transmission services then in 
operation and shall include a minimum fee for each such type of 
service, such differences to be based on criteria including, but not 
limited to, the quantity and nature of the use of sound recordings 
and the degree to which use of the service may substitute for or may 
promote the purchase of phonorecords by consumers. In establishing 
rates and terms for transmissions by eligible nonsubscription 
services and new subscription services, the Copyright Royalty Judges 
shall establish rates and terms that most clearly represent the 
rates and terms that would have been negotiated in the marketplace 
between a willing buyer and a willing seller. In determining such 
rates and terms, the Copyright Royalty Judges shall base [their] 
decision on economic, competitive and programming information 
presented by the parties, including--
    (i) whether use of the service may substitute for or may promote 
the sales of phonorecords or otherwise may interfere with or may 
enhance the sound recording copyright owner's other streams of 
revenue from its sound recordings; and
    (ii) the relative roles of the copyright owner and the 
transmitting entity in the copyrighted work and the service made 
available to the public with respect to relative creative 
contribution, technological contribution, capital investment, cost, 
and risk.

17 U.S.C. 114(f)(2)(B).

    The statute further directs the Judges to set ``a minimum fee for 
each such type of service'' and grants the Judges discretion to 
consider the rates and terms for ``comparable types of digital audio 
transmission services and comparable circumstances under voluntary 
license agreements'' negotiated under the voluntary negotiation 
provisions of the statute. Id.
2. The Relationship of the Statutory Factors to the ``Willing Buyer/
Willing Seller'' Standard
    Webcaster I clarified the relationship of the statutory factors to 
the willing buyer/willing seller standard. The standard requires a 
determination of the rates that a willing buyer and willing seller 
would agree upon in the marketplace. In making this determination, the 
two factors in section 114(f)(2)(B)(i) and (ii) must be considered, but 
neither factor defines the standard. They do not constitute additional 
standards, nor should they be used to adjust the rates determined by 
the willing buyer/willing seller standard. The statutory factors are 
merely to be considered, along with other relevant factors, to 
determine the rates under the willing buyer/willing seller standard. 
Webcaster I; In re Rate Setting for Digital Performance Right in Sound 
Recordings and Ephemeral Recordings, No. 2000-9 CARP DTRA 1 & 2 
(``Webcaster I Carp Report'').
3. The Nature of ``The Marketplace''
    The parties agree that the directive to set rates and terms that 
``would have been negotiated'' in the marketplace between a willing 
buyer and a willing seller reflects Congressional intent for the Judges 
to attempt to replicate rates and terms that ``would have been 
negotiated'' in a hypothetical marketplace. Webcaster I CARP Report at 
21. The ``buyers'' in this hypothetical marketplace are the Services 
(and other similar services) and this marketplace is one in which no 
statutory license exists. Id. See also Noncommercial Educational 
Broadcasting Compulsory License (Final rule and order), 63 FR 49823, 
49835 (September 18, 1998) (``[I]t is difficult to understand how a 
license negotiated under the constraints of a compulsory license, where 
the licensor has no choice but to license, could truly reflect `fair 
market value.' ''). The ``sellers'' in this hypothetical marketplace 
are record companies, and the product being sold consists of a blanket 
license for the record companies' complete repertoire of sound 
recordings. Webcaster I, 67 FR 45244 (July 8, 2002).
4. The Appropriate Willing Buyer/Willing Seller Rate
    As noted, the statute directs us to ``establish rates and terms 
that most clearly represent the rates and terms that would have been 
negotiated in the marketplace.'' 17 U.S.C. 114(f)(2)(B) (emphasis 
added). In the hypothetical marketplace we attempt to replicate, there 
would be significant variations, among both buyers and sellers, in 
terms of sophistication, economic resources, business exigencies, and 
myriad other factors. Congress surely understood this when formulating 
the willing buyer/willing seller standard. Accordingly, the Judges 
construe the statutory reference to rates that ``most clearly represent 
the rates * * * that would have been negotiated in the marketplace'' as 
the rates to which, absent special circumstances, most willing buyers 
and willing sellers would agree. Webcaster I, 67 FR 45244, 45245 (July 
8, 2002); Webcaster I CARP Report at 25, 26.

C. Section 112(e)

    The criteria for setting rates and terms for the section 112 
ephemeral license are enunciated under 17 U.S.C. 112(e)(4), which 
provides in pertinent part:

    The Copyright Royalty Judges shall establish rates that most 
clearly represent the fees that would have been negotiated in the 
marketplace between a willing buyer and a willing seller. In 
determining such rates and terms, the Copyright Royalty Judges shall 
base their decision on economic, competitive, and programming 
information presented by the parties, including--
    (A) whether use of the service may substitute for or may promote 
the sales of phonorecords or otherwise interferes with or enhances 
the copyright owner's traditional streams of revenue; and
    (B) the relative roles of the copyright owner and the 
transmitting organization in the copyrighted work and the service 
made available to the public with respect to relative creative 
contribution, technological contribution, capital investment, cost, 
and risk.

17 U.S.C. 112(e)(4). As does section 114, this section further directs 
the Judges to set ``a minimum fee for each type of service.'' 17 U.S.C. 
112(e)(4). Although section 112 does not explicitly grant the Judges 
discretion to consider the rates and terms for comparable types of 
services, it does explicitly grant discretion to ``consider the rates 
and terms under voluntary license agreements'' negotiated under the 
provisions of the statute. 17 U.S.C. 112(e)(4). Accordingly, while the 
language of the two sections varies in minor respects, the Judges 
interpret the criteria for setting rates and terms as

[[Page 24088]]

essentially identical. See Webcaster I Order of July 16, 2001, at 5.

IV. Determination of Royalty Rates

A. Application of Section 114 and Section 112

    Based on the applicable law and relevant evidence received in this 
proceeding, the Copyright Royalty Judges must determine rates for two 
licenses, the section 114 webcaster performance license and the section 
112 ephemeral reproduction license. The Copyright Act requires that the 
Copyright Royalty Judges establish rates for each of these two licenses 
that most clearly represent those ``that would have been negotiated in 
the marketplace between a willing buyer and a willing seller'' and 
directs the Copyright Royalty Judges to set a minimum fee for each 
license. In the case of both licenses, the Copyright Act requires the 
Copyright Royalty Judges to take into account evidence presented on 
such factors as (1) whether the use of the webcasting services may 
substitute for or promote the sale of phonorecords and (2) whether the 
copyright owner or the service provider make relatively larger 
contributions to the service ultimately provided to the consuming 
public with respect to creativity, technology, capital investment, cost 
and risk. 17 U.S.C. 114(f)(2)(B) and 17 U.S.C. 112 (e)(4).
    Having carefully considered the relevant law and the evidence 
received in this proceeding, the Copyright Royalty Judges determine 
that the appropriate section 114 performance license rate is a per 
performance usage rate for Commercial Webcasters and an annual flat 
per-station rate for Noncommercial Webcasters for use up to a specified 
cap coupled with a per performance rate for use above the cap, while 
the appropriate section 112 reproduction license rate is deemed to be 
included in the applicable respective section 114 license rates.
    The applicable rate structure is the starting point for the 
Copyright Royalty Judges' determination.

B. The Rate Proposals of the Parties and the Appropriate Royalty 
Structure for Section 114 Performance Licenses

1. Commercial Webcasters
    The contending parties present several alternative rate structures 
for Commercial Webcasters. In its final revised rate proposal, 
SoundExchange argues in favor of a monthly fee equal to the greater of: 
30% of gross revenues or a performance rate beginning at $.0008 per 
performance in 2006 and increasing annually to $.0019 by 2010.\4\ This 
fee structure is proposed for nonsubscription services and is modified 
to add a third alternative in its ``greater of'' formulation of a $1.37 
per subscriber minimum for new subscription services.\5\ An exception 
to this ``greater of'' formulation is proposed for so-called ``bundled 
services'' from which SoundExchange seeks a per performance rate of 
$.002375 to be adjusted each year by the change in the CPI-U. 
SoundExchange's Revised Rate Proposal (filed September 29, 2006) at 2-
12.
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    \4\ The latter $.0019 per performance rate is to be adjusted by 
the change in the CPI-U from December 2005 to December 2009 
(accordingly, if the CPI-U increases by 3% in each of these four 
twelve-month periods, the resulting per performance rate for 2010 
would increase from $.0019 to $.00214).
    \5\ In addition, SoundExchange proposes an adjustment to its 
revenue alternative based on time spent listening to music for so-
called ``non-music'' services, a per performance rate of $.002375 to 
be adjusted each year by the change in the CPI-U for ``bundled 
services'' and a 25% premium for transmissions terminating on 
wireless devices for nonsubscription services, new subscription 
services and bundled services.
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    By contrast, DiMA on behalf of certain large commercial webcasters, 
proposes a fee structure under which webcasters could elect a fee equal 
to either $.00025 per performance or $.0038 per Aggregate Tuning Hour 
(``ATH'') or 5.5% of revenue directly associated with the streaming 
service. However, DiMA applies only its per performance usage rate to 
``bundled services'' situations where the bundle price to the consumer 
is not allocated as between the individual component parts of the 
bundle. DiMA PFF at ]] 35-38.
    Smaller commercial webcasters present varying proposals. SBR 
Creative Media, Inc., a privately owned commercial webcaster, proposes 
a fee structure under which webcasters can elect a fee equal to either 
a use metric of $.0033 per Aggregate Tuning Hour (``ATH'') or 4% of 
gross revenue. SBR Creative Media PFF at ] 19. The self-styled Small 
Commercial Webcasters,\6\ in contrast to all the other commercial 
parties, propose a pure revenue-based metric equal to 5% of gross 
revenues. Small Commercial Webcasters PCL at ] 24.
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    \6\ The Small Commercial Webcasters are AccuRadio, LLC; 
Digitally Imported, Inc.; Radioio.com, LLC; Discombobulated, LLC; 
3WK, LLC and Radio Paradise, Inc.
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    Radio Broadcasters propose an annual flat fee \7\ structure 
generally related to usage as reflected in the format of the radio 
station being simulcast over the web. For example, Radio Broadcasters 
propose that music-formatted stations pay a fee ranging from as little 
as $500 per annum for small stations in low revenue ranked markets to 
as much as $8,000 per annum for large stations in high revenue ranked 
markets, but further propose that news, talk, sports and/or business 
stations pay $250 per annum irrespective of station size in low revenue 
ranked markets and $750 per annum irrespective of station size in high 
revenue ranked markets. Finally, Radio Broadcasters propose that 
stations with mixed music/non-music formats pay a percentage of the 
music format fee, depending on the percentage of programming identified 
as music programming. Radio Broadcasters PFF at ]] 325-338.
---------------------------------------------------------------------------

    \7\ Radio Broadcasters further propose that the structure 
increase across the board by 4% annually over the term of the 
license.
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    In short, among the parties on both sides who have proposed rates 
covering Commercial Webcasters, only Small Commercial Webcasters 
propose a fee structure based solely on revenue. However, in making 
their proposal, this group of five webcasters clearly is unconcerned 
with the actual structure of the fee, except to the extent that a 
revenue-based fee structure especially one in which the percent of 
revenue fee is a single digit number (i.e., 5%)--can protect them 
against the possibility that their costs would ever exceed their 
revenues.\8\ Their only witness, Kurt Hanson, CEO/President of 
AccuRadio, LLC, in fact, provided testimony indicating that the Small 
Commercial Webcasters were, at bottom, concerned with the amount of the 
fee rather than the structure of the fee. (``Obviously, were there to 
be a sound recording royalty based on performances that was at an 
extremely low rate * * * a percentage-of-revenue model might not be 
required. And just as obviously, a confiscatory percentage-of-revenue 
rate would not allow these companies [the Small Commercial Webcasters] 
to survive.'') Hanson, WDT at 4 n.2. Small Commercial Webcasters' focus 
on the amount of the fee, rather than how it should be structured, is 
further underlined by the absence of evidence submitted by this group 
to identify a basis for applying a pure revenue-based structure to 
them. While, at times, they suggest that their situation as small

[[Page 24089]]

commercial webcasters requires this type of structure, there is no 
evidence in the record about how the Copyright Royalty Judges would 
delineate between small webcasters and large webcasters.\9\ Similarly, 
while Mr. Hanson asserts that a percentage-of-revenue is necessary 
because ``this is a nascent industry'' or because small entrepreneurs 
require such a structure, 8/3/06 Tr. 49:12-22 (Hanson), he offers no 
evidence to support that assertion or to help define the parameters of 
the assertion. Furthermore, the only other self-styled small 
entrepreneur to offer testimony in this proceeding, SBR Creative Media 
Inc., specifically includes a usage metric in its rate proposal and 
neither SBR Creative Media, Inc. nor the Small Commercial Webcasters 
offers any evidence to distinguish between their respective situations.
---------------------------------------------------------------------------

    \8\ It must be emphasized that, in reaching a determination, the 
Copyright Royalty Judges cannot guarantee a profitable business to 
every market entrant. Indeed, the normal free market processes 
typically weed out those entities that have poor business models or 
are inefficient. To allow inefficient market participants to 
continue to use as much music as they want and for as long a time 
period as they want without compensating copyright owners on the 
same basis as more efficient market participants trivializes the 
property rights of copyright owners. Furthermore, it would involve 
the Copyright Royalty Judges in making a policy decision rather than 
applying the willing buyer/willing seller standard of the Copyright 
Act.
    \9\ Indeed, since none of the small commercial webcasters 
participating in this proceeding provided helpful evidence about 
what demarcates a ``small'' commercial webcaster from other 
webcasters at any given point in time, any determination that a 
revenue-based metric was somehow uniquely applicable to small 
commercial webcasters would be speculative.
---------------------------------------------------------------------------

    While each of the remaining contending parties--SoundExchange, 
DiMA, Radio Broadcasters and SBR Creative Media, Inc.--proposes a fee 
structure for Commercial Webcasters that contains revenue-based 
elements as well as either usage elements or a usage alternative, from 
the evidence of record, the Copyright Royalty Judges conclude that 
numerous factors weigh in favor of a per-performance usage fee 
structure for Commercial Webcasters.
    First, as aptly stated by Dr. Adam Jaffe, revenue merely serves as 
``a proxy'' for what ``we really should be valuing, which is 
performances.'' Jaffe, WDT Section N, Designated Testimony (Jaffe WDT 
in Webcaster I at 22). By contrast, a per-performance metric ``is 
directly tied to the nature of the right being licensed, unlike other 
bases such as revenue * * * of the licensee.'' Id. (Emphasis in 
original.) The more intensively an individual service is used and 
consequently the more the rights being licensed are used, the more that 
service pays and in direct proportion to the usage.\10\ Jaffe, WDT 
Section N, Designated Testimony (Jaffe WDT in Webcaster I at 21-22). As 
Dr. Jaffe points out, with a usage metric, the resultant ``scaling'' of 
the royalty paid to the extent of use ``is intuitively appealing and is 
a common feature'' of intellectual property licenses. Jaffe, WDT at 32. 
Dr. Jaffe notes that, by contrast, ``Revenue is a less exact proxy for 
the scale of activity, because the revenue that a licensee derives, 
even from its music-related activities can be influenced by a variety 
of factors that have nothing to do with music.'' Id. Therefore, Dr. 
Jaffe cautions that a revenue-based metric should only be used as a 
proxy for a usage-based metric where the revenue base used for royalty 
calculation is ``carefully defined to correspond as closely as possible 
to the intrinsic value of the licensed property.'' Id. The Copyright 
Royalty Judges do not find a sufficient clarity of evidence based on 
the record in this proceeding to produce a revenue-based metric that 
can serve as a good proxy for a usage-based metric. Furthermore, there 
was no persuasive evidence offered by any commercial webcasting/
simulcasting party to indicate that a usage-based metric is not readily 
calculable and, that as a consequence, the Copyright Royalty Judges 
must resort to some proxy metric in reaching their fee determination.
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    \10\ Dr. Erik Brynjolfsson is similarly of the opinion that 
``the rates paid by a given company should take into account that 
different companies use different amounts of music.'' 11/21/06 Tr. 
251:2-18 (Brynjolfsson).
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    Second, percentage-of-revenue models present measurement 
difficulties because identifying the relevant webcaster revenues can be 
complex, such as where the webcaster offers features unrelated to 
music. Webcaster I noted this particular difficulty. 67 FR 45249 (July 
8, 2002). Mixed format webcasters/simulcasters continue to make up a 
significant part of the commercial webcasting market and, in a number 
of cases, generate the more significant portion of their revenues from 
non-music programming. RBX1; RBX7; RBX20; 7/27/06 Tr. 283:7-285:12 
(Hauth). Clearly, questions surrounding the proper allocation of 
revenues related to music use in such instances present greater 
complexity than a straightforward use of a usage-based approach.\11\
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    \11\ This is illustrated in the SoundExchange rate proposal 
where an additional adjustment is made to the proposed revenue rate 
where services conform to a definition of ``non-music services'' as 
measured by the listening time of end users. By contrast, in the 
same rate proposal no such adjustment needs to be made to the 
proposed usage rate for the same services. The added information 
necessary for the adjustment as well as the process of adjustment to 
the revenue-based metric clearly would raise the transaction costs 
of implementing a revenue rate structure as compared to the usage-
based metric. SoundExchange's Revised Rate Proposal (filed September 
29, 2006) at 11-12.
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    Third, percentage of revenue metrics ultimately demand a clear 
definition of revenue so as to properly relate the fee to the value of 
the rights being provided, and no such clear definition has been 
proffered by the parties. Indeed, the definition of revenue has been a 
point of substantial contention between two of the parties in this 
proceeding. SoundExchange sought an expansive definition of revenue, 
ostensibly covering revenues from subscription fees, advertisements (of 
many kinds including advertisements directly and indirectly derived 
from webcasting), sales of products and commissions from third party 
sales, software fees and sales of data. SoundExchange's Revised Rate 
Proposal (filed September 29, 2006) at 12-17. But the Copyright Royalty 
Judges are not persuaded that all the elements of the SoundExchange 
definition of revenue have been shown, in every instance, to be related 
to the use of the rights provided to licensees.\12\ For example, there 
is some evidence presented by the Radio Broadcasters that on-air 
talent, programming director contributions and marketing skills impact 
the revenues of simulcasting webcasters. Radio Broadcasters PFF at ]] 
234, 237, 240. DiMA has proposed a much more restrictive definition of 
revenue as part of its rate proposal which it seeks to support through 
the testimony of its witness, Donald Fancher. On the whole, we find 
little to recommend Mr. Fancher's testimony, but the Copyright Royalty 
Judges do observe that even Mr. Fancher conceded that, on various 
points, the DiMA proposed definition was unclear. 6/22/06 Tr. 292:11-
295:14; 308:1-309:1; 311:15-312:10; 315:17-317:14 (Fancher). The 
absence of persuasive evidence of what constitutes an unambiguous 
definition of revenue that properly relates the fee to the value of the 
rights being provided militates against reliance on a revenue-based 
metric.
---------------------------------------------------------------------------

    \12\ Moreover, the mere process of measuring such an expansive 
array of revenues must necessarily raise transaction costs for the 
parties.
---------------------------------------------------------------------------

    Fourth, the use of a revenue-based metric gives rise to difficult 
questions for purposes of auditing and enforcement related to payment 
for the use of the license. The per-performance approach involves the 
relatively straightforward application of a rate to reports of use 
(recordkeeping) data that is already required to be produced by the 
Services. See 37 CFR part 370. While audit and enforcement issues may 
arise even with a pure usage metric, the alternative use of a revenue-
based metric will give rise to additional, different issues of 
interpretation and controversy related to how revenues are defined or 
allocated. See, for example, Radio Broadcasters PFF at ] 258 and 7/31/
06 Tr. 78:3-11, 79:1-13 (Parsons). In other words, the introduction of 
multiple payment systems will augment

[[Page 24090]]

the transactions costs imposed on the parties.
    Fifth, the way that the contending parties, in particular 
SoundExchange and DiMA, suggest using a revenue-based metric in their 
rate proposals does not square with the basic notion agreed to by their 
respective experts (Dr. Brynjolfsson for SoundExchange and Dr. Jaffe 
for DiMA) that the more the rights being licensed are used, the more 
payments should increase in direct proportion to usage. See supra at 
Section IV.B.1. SoundExchange seeks to use the revenue-based metric to 
insure that it will share in any revenue produced by the Services that 
is greater than what it would receive based on a usage rate coupled 
with actual usage. Pelcovits WDT at 28. This could result in a 
situation where the Services would be forced to share revenues that are 
not attributable to music use, but rather to other creative or 
managerial inputs. DiMA, on the other hand, seeks to employ a revenue-
based metric to protect against the failure of revenues produced by the 
Services (particularly as they pursue a shift to advertising-supported 
business models) to rise to the level necessary to pay for music use 
based on actual usage. Winston WDT at 10. This could result in a 
situation in which copyright owners are forced to allow extensive use 
of their property without being adequately compensated due to factors 
unrelated to music use such as a dearth of managerial acumen at one or 
more Services. The similar potentiality that webcasters might generate 
little revenue and, under a revenue-based metric, produce a situation 
where copyright owners receive little compensation for the extensive 
use of their property was a concern that animated the Librarian to 
approve a per performance metric rather than providing for a revenue-
based payment option in Webcaster I. 67 FR 45249 (July 8, 2002).
    For all of the above reasons, the Copyright Royalty Judges conclude 
that evidence in the record weighs in favor of a per-performance usage 
fee structure for Commercial Webcasters. This does not mean that some 
revenue-based metric could not be successfully developed as a proxy for 
the usage-based metric at some time in the future by the parties if the 
problems noted above were remedied. It does mean that the parties to 
this proceeding have not overcome these problems in the context of the 
proposals they have offered in this proceeding.\13\
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    \13\ While both SoundExchange and DiMA have pointed to a number 
of agreements covering music rights that embody an alternative 
revenue-based metric, they have not shown: (1) Whether those 
agreements have overcome these problems or, (2) if so, how those 
agreements have overcome these problems or, (3) most importantly, 
how their proposed rate structures embody comparable mechanisms for 
overcoming these problems. Nor have they demonstrated whether these 
other agreements have been negotiated with a revenue-based option in 
the context of comparable circumstances-for example, an agreement 
negotiated with a revenue-based alternative because of an inability 
of some services to account for performances would not be comparable 
to the circumstances at hand because of our recordkeeping 
requirements at 37 CFR part 370.
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    A further consequence of the Copyright Royalty Judges rejecting the 
revenue-based metric as a proxy for a usage-based metric is to 
eliminate the need for a rate structure formulated as a ``greater of'' 
or ``lesser of'' comparison between per performance metrics and 
alternative revenue-based metrics.\14\ Therefore, the Copyright Royalty 
Judges determine that a per-performance rate structure will be utilized 
for eligible nonsubscription transmission services, new subscription 
services and bundled services and where such services are commercial 
Services.
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    \14\ In addition, while SoundExchange proposes a third 
alternative--a per subscription minimum dollar amount--to be applied 
to new subscription services, the Copyright Royalty Judges do not 
find the basis for this alternative structure to be supported by 
persuasive evidence. SoundExchange cannot be proposing this per 
subscription alternative because of a lack of music usage data from 
subscription services, because the per subscription alternative 
itself requires such usage data in order to make a pro rata 
distribution of the per subscription minimum to the record 
companies. See Pelcovits WDT at 22. Nor does SoundExchange present 
persuasive evidence that the availability of this per subscription 
alternative is necessary because it is easier to administer and thus 
will reduce transaction costs. Indeed, although SoundExchange makes 
it an alternative to the per-performance fee in its proposed 
structure, SoundExchange presents its purpose as equivalent to the 
function served by the per-performance fee in its proposed fee 
structure. See Pelcovits WDT at 28-29. Moreover, SoundExchange's own 
expert economist, Dr. Brynjolfsson, further notes that in cases 
where webcasters ``monetize'' the value of the sound recording 
license through subscriptions or advertising revenue, ``counting the 
number of plays is a good proxy'' for that value. 5/18/06 Tr. 116:9-
117:14 (Brynjolfsson). For all these reasons, the Copyright Royalty 
Judges decline to establish such a duplicative structure.
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2. Noncommercial Webcasters
    The Copyright Royalty Judges also find that a revenue-based metric 
is not a good proxy for a usage-based metric as applied to 
noncommercial webcasters in the non-interactive webcasting marketplace 
because, in addition to suffering from the same shortcomings discussed 
supra at Section IV.B.1. in the context of the Commercial 
Webcasters,\15\ no evidence of negotiated agreements applying a 
revenue-based metric to Noncommercial Webcasters has been presented by 
any of the parties.
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    \15\ Indeed, the use of a revenue-based metric in connection 
with Noncommercial Webcasters may further exacerbate transactions 
costs where defining of revenue, accounting for revenue and auditing 
of such accounts involve different concepts for the noncommercial, 
non-profit entities that populate this marketplace as compared to 
the accounting concepts and approaches applicable to commercial 
entities. For example, NPR derives significant amounts of its 
revenues from several sources not typically found as a source of 
commercial service revenue, such as underwriting, donations, public 
funds and the NPR Foundation. NPR PFF at ] 18.
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    Only one party in this proceeding, SoundExchange, proposes that 
Noncommercial Webcasters should be subject to a rate structure 
incorporating a revenue-based metric as one alternative means of 
payment. SoundExchange specifically proposes that Noncommercial 
Webcasters pay according to the same structure and rates applicable to 
Commercial Webcasters, previously summarized supra at Section IV.B.1.
    The Noncommercial Webcasters propose a variety of rates that are 
(or could be read as) per station flat rates. For example, NPR proposes 
a flat fee of $80,000 per annum, with successive years after the first 
year increased by a cost-of-living adjustment as determined by the 
change in the CPI. NPR proposes that this flat fee cover all NPR (798) 
and CPB-qualified stations (estimated at 100 or 200). Stern WDT at 13; 
6/27/06 Tr. 154:18-155:18 (Stern).
    The NRBNMLC proposes that non-commercial, non-NPR music stations 
pay a flat annual fee consisting of the lesser of (a) $200 per Internet 
simulcast and up to two associated side channels or (b) $500 per group 
of up to five Internet simulcasts and up to two Internet-only side 
channels per simulcast. The NRBNMLC further proposes that for news, 
talk, business, teaching/talk, or sports stations the aforementioned 
annual fee alternatives drop to $100 and $250 respectively. Mixed 
format stations would pay a pro rata share of these annual fees based 
on the demonstrated music-talk programming breakdown. Finally, NRBNMLC 
proposes that all five years of such fees covering the 2006-2010 
license term be paid in one lump sum at the beginning of the term, 
except that a broadcaster that stops streaming before the end of the 
term would be entitled to a pro rata refund.\16\ NRBNMLC Fee Proposal 
August 1, 2006.
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    \16\ NRBNMLC also proposes a decrease in its annual fees ``to 
match the per station fees of NPR if the NPR station fees are lower 
than the above-stated fees.'' NRBNMLC Fee Proposal August 1, 2006.
---------------------------------------------------------------------------

    IBS' amended rate proposal seeks a $100 annual rate for large 
college stations and a $25 annual rate for

[[Page 24091]]

smaller college stations.\17\ IBS Clarification of Common Rate Proposal 
(August 10, 2006).\18\ CBI proposed a flat annual fee of $175 for 
educational stations. CBI Amended Introductory Statement at 6.
---------------------------------------------------------------------------

    \17\ The IBS rates herein summarized were to be applicable only 
to noncommercial educational stations not covered by the annual lump 
sum payment proposed by NPR and CPB.
    \18\ IBS' original proposal consisted of a flat fee of $500 per 
year for music stations and $250 per year for non-music stations, 
with additional payments in the event that the webcaster exceeded 
146,000 aggregate tuning hours in a month. Kass WDT at Ex. A.
---------------------------------------------------------------------------

    For the reasons discussed infra at Section IV.C.2.a., the Copyright 
Royalty Judges determine that Commercial Webcasters and certain 
Noncommercial Webcasters represent two different segments of the 
marketplace. In contrast to the general commercial marketplace, 
agreements produced by the parties in this proceeding covering 
noncommercial services typically structured payments as flat fees. See, 
for example, SERV-D-X 157. Furthermore, no evidence was presented by 
the parties that could be used in a precise way to convert such flat 
annual fees into a reliable per-performance metric. Consequently, only 
a per station metric could be ascertained from such flat fees.
    Flat annual fees do not present the complexity, measurement 
difficulties, accounting and enforcement issues presented by revenue-
based alternatives, and, as a result, do not increase transaction costs 
beyond what might be experienced under a usage-based fee structure. On 
the other hand, flat fees do permit increasing usage without increasing 
payment.
    However, as noted infra at Section IV.C.2.a, the Copyright Royalty 
Judges have determined that in order to preserve the distinction 
between the commercial webcasters and certain noncommercial segments of 
the marketplace over the period of the license term, a cap on usage 
must be established for certain noncommercial webcasters.
    In short, the Copyright Royalty Judges conclude that, on balance, 
the most appropriate rate structure for noncommercial services that can 
be reliably derived from the record of evidence is an annual flat per-
station rate structure for use by certain noncommercial webcasters up 
to a specified cap coupled with a per performance rate for use by 
noncommercial services that exceed the cap.

C. The Section 114 Royalty Rates and Minimum Fees

1. Commercial Webcasters
a. The ``Willing Buyer/Willing Seller Standard''
    As previously noted hereinabove, supra at Section IV.A., the 
Copyright Act requires that the Copyright Royalty Judges establish 
rates for the section 114 performance license that ``most clearly'' 
represent those ``that would have been negotiated in the marketplace 
between a willing buyer and a willing seller.'' Both the copyright 
owners and the commercial services agree that the willing buyer/willing 
seller standard should be applied by the Copyright Royalty Judges in 
determining the rates for the section 114 license and both the 
copyright owners and the commercial services agree that those rates 
should reflect the rates that would prevail in a hypothetical 
marketplace that was not constrained by a statutory license. Finally, 
both copyright owners and commercial services agree that the best 
approach to determining what rates would apply in such a hypothetical 
marketplace is to look to comparable marketplace agreements as 
``benchmarks'' indicative of the prices to which willing buyers and 
willing sellers in this marketplace would agree. SoundExchange PFF at 
]] 215-219; SoundExchange PCL at ]] 4-27; DiMA and Radio Broadcasters 
JPFF at ]] 75-80; DiMA and Radio Broadcasters JPCL at ]] 28-9; DiMA PFF 
at ]] 39-45; Radio Broadcasters PFF at ]] 296-301; SBR Creative Media, 
Inc. PFF at ]] 17; Small Commercial Webcasters PFF at ]] 24-28.
    However, the parties, to some extent, appear to disagree about the 
degree of competition among sellers required by law in the hypothetical 
marketplace, resulting in different definitions of the sellers in the 
hypothetical marketplace.\19\ SoundExchange accuses the Services of 
seeking a marketplace characterized by perfect competition. DiMA and 
the Radio Broadcasters claim that SoundExchange is championing a 
marketplace characterized by monopoly power on the seller's side. 
SoundExchange PCL at ] 38; DiMA and Radio Broadcasters JPCL at ]] 29, 
36. We find that these extreme characterizations miss the mark.
---------------------------------------------------------------------------

    \19\ For example, at one extreme, if no competition exists on 
the seller's side of the market (i.e., the seller is a monopolist), 
then the degree of competition observed describes the number of 
sellers in the marketplace (i.e., there is a single seller in the 
marketplace).
---------------------------------------------------------------------------

    The question of competition is not confined to an examination of 
the seller's side of the market alone. Rather, it is concerned with 
whether market prices can be unduly influenced by sellers' power or 
buyers' power in the market. This issue was addressed in Webcaster I. 
An effectively competitive market is one in which super-competitive 
prices or below-market prices cannot be extracted by sellers or buyers, 
because both bring ``comparable resources, sophistication and market 
power to the negotiating table.'' 67 FR 45245 (July 8, 2002). In other 
words, neither sellers nor buyers can be said to be ``willing'' 
partners to an agreement if they are coerced to agree to a price 
through the exercise of overwhelming market power.
    Furthermore, we find that in the hypothetical marketplace that 
would exist in the absence of a statutory license constraint, the 
willing sellers are the record companies. Any cognizable entity smaller 
than the record companies makes little sense because, in such cases, 
the larger buyers among the Services would enjoy disproportionate 
market power resulting in below-market prices. At the same time, if the 
sellers' side of the market were characterized by so many sellers as to 
be consistent with perfect competition, the transaction costs to the 
buyers of the copyrights would likely be prohibitive.
    Webcaster I made clear that ``the willing buyers are the services 
which may operate under the webcasting license (DMCA-compliant 
services), the willing sellers are record companies and the product 
consists of a blanket license for each record company which allows use 
of that record company's complete repertoire of sound recordings.'' 67 
FR 45244 (July 8, 2002) (emphasis added). None of the parties has 
adduced persuasive evidence that this definition of sellers has been 
altered in the marketplace as a result of greater or lesser competition 
between these sellers since Webcaster I was issued. For example, no 
party provided any empirical evidence on the elasticity of the demand 
curve facing these firms in the market or, more importantly, whether it 
has changed since Webcaster I. Similarly, no party produced persuasive 
evidence that market share had changed substantially among the record 
companies in the hypothetical marketplace since Webcaster I.\20\
---------------------------------------------------------------------------

    \20\ Dr. Jaffe presents some testimony implying anti-competitive 
market share differences and the potentially collusive use of 
``most-favored-nations'' clauses in the interactive music service 
marketplace. See Jaffe WRT at 6-16. However, the Copyright Royalty 
Judges do not find Dr. Jaffe's testimony persuasive even with 
respect to this different marketplace. See infra at Section 
IV.C.1.b.iii..

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[[Page 24092]]

    As articulated in the Copyright Act, the ``willing buyer/willing 
seller standard'' encompasses consideration of economic, competitive 
and programming information presented by the parties, including (1) the 
promotional or substitution effects of the use of webcasting services 
by the public on the sales of phonorecords and (2) the relative 
contributions made by the copyright owner and the webcasting service 
with respect to creativity, technology, capital investment, cost and 
risk in bringing the copyrighted work and the service to the public. 
Because we adopt a benchmark approach to determining the rates, we 
agree with Webcaster I that such considerations ``would have already 
been factored into the negotiated price'' in the benchmark agreements. 
67 FR 45244 (July 8, 2002). Therefore, such considerations have been 
reviewed by the Copyright Royalty Judges in our determination of the 
most appropriate benchmark from which to set rates. We have further 
reviewed the evidence bearing on these considerations to determine if 
the benchmark agreements require any further adjustment based on any 
evidence of differences between the benchmark market and the target 
hypothetical market. See infra at Section IV.C.1.c.
b. Benchmarks For Setting Market Rates
    Notwithstanding their general agreement that a benchmark approach 
is the best way to setting rates in this hypothetical marketplace, the 
parties disagree about what constitutes the appropriate benchmark 
indicative of the prices to which willing buyers and willing sellers in 
this marketplace would agree. SoundExchange maintains that the most 
appropriate benchmark agreements, as analyzed by its expert economist, 
Dr. Michael Pelcovits, are those found in the market for interactive 
webcasting covering the digital performance of sound recordings. 
SoundExchange PFF at ] 216. On the other hand, DiMA, Radio Broadcasters 
and Small Commercial Webcasters argue that the most appropriate 
benchmarks are agreements between the performing rights organizations 
(especially, ASCAP and BMI) and webcasters covering the digital public 
performance of musical works. DiMA PFF at ]] 39-45; Radio Broadcasters 
PFF at ] 297; Small Commercial Webcasters PFF at ]] 24-26. SBR Creative 
Media, Inc. claims analog over-the-air broadcast music radio as its 
benchmark, with reference to musical composition royalties paid by such 
broadcasters to the performing rights organizations (``PROs''). SBR 
Creative Media, Inc. Rahn WDT at 11.
    We find, based on the available evidence before us, that the most 
appropriate benchmark agreements are those reviewed by Dr. Pelcovits in 
the market for interactive webcasting covering the digital performance 
of sound recordings.
i. The Interactive Webcasting Market Benchmark
    The interactive webcasting market is a benchmark with 
characteristics reasonably similar to non-interactive webcasting, 
particularly after Dr. Pelcovits' final adjustment for the difference 
in interactivity. Both markets have similar buyers and sellers and a 
similar set of rights to be licensed (a blanket license in sound 
recordings). Both markets are input markets and demand for these inputs 
is driven by or derived from the ultimate consumer markets in which 
these inputs are put to use. In these ultimate consumer markets, music 
is delivered to consumers in a similar fashion, except that, as the 
names suggest, in the interactive case the choice of music that is 
delivered is usually influenced by the ultimate consumer, while in the 
non-interactive case the consumer usually plays a more passive role. 
Pelcovits WDT at 5-15. But this difference is accounted for in Dr. 
Pelcovits' analysis. In order to make the benchmark interactive market 
more comparable to the non-interactive market, Dr. Pelcovits adjusts 
the benchmark by the added value associated with the interactivity 
characteristic. Pelcovits WDT at 37-41. In short, the Copyright Royalty 
Judges find the Pelcovits benchmark to be of the comparable type that 
the Copyright Act invites us to consider. 17 U.S.C. 114(f)(2)(B) (``In 
establishing such rates and terms, the Copyright Royalty Judges may 
consider the rates and terms for comparable types of digital audio 
transmission services and comparable circumstances under voluntary 
license agreements negotiated under subparagraph (A).'').
ii. SoundExchange's Proposed Corroborative Evidence
    SoundExchange offers additional relevant evidence from the 
marketplace for other types of digital music services to corroborate 
Dr. Pelcovits' analysis by showing that, for many types of music 
services, a substantial portion of revenue is paid to sound recording 
copyright owners above the current statutory rate, just as it would be 
under the rate proposal that Dr. Pelcovits' analysis seeks to support. 
See, for example, summary chart of Universal Music Group agreements 
covering various digital music marketplaces at SoundExchange PFF at ] 
338. We find these additional voluntary agreements covering such 
digital services as clip licenses, permanent audio downloads, etc. of 
some general corroborative value. These data show that, in many cases, 
the price paid by buyers for the rights to utilize a sound recording in 
various ways is as much as or higher than the rate proposed by Dr. 
Pelcovits as a result of his benchmark analysis.\21\ This shows that 
the prevailing rates in these other markets do not appear to undermine 
his analysis--some indication of general reasonableness.
---------------------------------------------------------------------------

    \21\ Although, little effort is made in the presentation of this 
corroborative data to reconcile differences that may exist between 
these markets and adjust for such differences.
---------------------------------------------------------------------------

    At the same time, SoundExchange offered further purportedly 
corroborative testimony by its economic expert, Dr. Brynjolfsson, which 
seeks to support its rate proposal based on an analysis of costs and 
revenues related to webcasting and of the ``surplus'' that would be 
generated over the course of the license period. Dr. Brynjolfsson 
testified that one approach to determining the price a seller would 
obtain in the market is to measure the ``surplus'' that would be 
generated when the seller's input is added to the buyer's service and 
sold to the public, and then to divide that ``surplus'' between the 
buyer and the seller. In order to make the division, it is necessary to 
determine the revenue that would be generated by the retail sale of the 
service and the service provider's other costs of providing the service 
(i.e., costs other than expenditures on the input sought to be valued). 
This requires certain information about the buyer, the seller and the 
marketplace to determine how the ``surplus'' would be divided. We find 
that the Brynjolfsson analysis relies on unsupported assumptions about 
market behavior and how negotiations take place in obtaining his 
results. For example, Dr. Brynjolfsson makes a questionable assumption 
that conditions in the real world justify the use of a 75% licensor to 
25% licensee ratio in bargaining power in his models for this market. 
5/18/2006 Tr. 120:1-124-3 (Brynjolfsson). No evidence from this market 
was provided to support this assumption. A different assumption of 
equal bargaining power would yield a different estimate of the proposed 
royalty rate. Similarly, other assumptions such as a 20% annual growth 
rate in the sell-out rates for

[[Page 24093]]

banner ads and a 10% annual growth rate in the sell-out rate for in-
stream advertising are not solidly supported. DiMA and Radio 
Broadcasters JPFF at ]] 206, 208. Different assumptions for these 
numbers would clearly provide different bottom-line rate determinations 
in Dr. Brynjolfsson's models. Then too, Dr. Brynjolfsson inputs data 
into his models in a less than rigorous fashion. For example, he relies 
on Accustream data as a source for certain cost data without examining 
the methodology used by Accustream in compiling the data. 5/18/2006 Tr. 
141:1-6 (Brynjolfsson). Dr. Brynjolfsson also uses such data to project 
future growth rates even though the source, Accustream, does not appear 
to discuss its methodology for collecting their data in the written 
report that supplies the data. SERV-D-X 37. Thus, if there is error in 
the original data stemming from the way it is collected, that error is 
compounded by applying growth rates to an erroneous base. Dr. 
Brynjolfsson also appears to have double-counted or miscounted certain 
types of revenue. DiMA and Radio Broadcasters JPFF at ]] 215, 216. In 
short, questionable assumptions coupled with concerns over the 
reliability of the data used in the Brynjolfsson models cause us to 
regard the ultimate findings of these models as effectively 
undeterminable. For those reasons, the Copyright Royalty Judges find 
that the Brynjolfsson models do not provide additional corroboration of 
SoundExchange's benchmark analysis and the rates proposed.\22\
---------------------------------------------------------------------------

    \22\ We do not intend to imply that all of the evidence offered 
by Dr. Brynjolfsson through his testimony is without value; rather, 
we simply find that his two formal models taken as a whole suffer 
from significant defects for the purposes at hand.
---------------------------------------------------------------------------

iii. Services' Objections to Pelcovits' Interactive Webcasting Market 
Benchmark Analysis Are Not Persuasive
    The Services' objections to the Pelcovits benchmark analysis are 
not supported by persuasive evidence. Their major objections are 
reflected in Dr. Jaffe's written rebuttal testimony and boil down to 
two: (1) The claim that this benchmark market is not adequately 
competitive and (2) certain alleged methodological flaws in the 
Pelcovits approach. Jaffe WRT at 4-24.
    As we have indicated hereinabove, supra at Section IV.C.1.a., the 
law does not require a perfectly competitive target market if that is 
the thrust of Dr. Jaffe's objections; therefore, neither does it 
require a perfectly competitive benchmark market because that would not 
be comparable to circumstances in the target market. Indeed, Webcaster 
I emphasizes that buyers and sellers participate in a ``competitive'' 
market for purposes of the law when they have comparable resources and 
market power.\23\ 67 FR 45245 (July 8, 2002).
---------------------------------------------------------------------------

    \23\ In other words, a ``competitive'' price could be deemed to 
have been set in a marketplace where sellers and buyers had roughly 
equal bargaining power, because the resulting price would be much 
closer to the perfectly competitive price than to a price determined 
in circumstances where the sellers exercised pure monopoly power or 
the buyers exercised pure monopsony power. That is, counterveiling 
power has the effect of yielding a more competitive result than does 
the absence of such counterveiling power.
---------------------------------------------------------------------------

    On the other hand, if the thrust of Dr. Jaffe's concerns are that 
the benchmark market is not sufficiently competitive to be similar to 
the competitive circumstances that prevail in the target hypothetical 
market, we find that the evidence does not support such a view. On the 
contrary, the evidence establishes that the benchmark market is 
sufficiently similar to the target hypothetical market to merit 
comparison. There are multiple sellers and buyers in each market--
indeed many are the same buyers and sellers. Pelcovits WDT at 12-13. In 
other words, the weight of the evidence supports the Pelcovits 
benchmark analysis.
    Dr. Jaffe's claim that buyers in the market for interactive 
webcasting face a different seller than the record companies because 
they need the portfolios of the four major record companies in order to 
provide a service to consumers is largely unsubstantiated.\24\ Dr. 
Jaffe himself concedes the possibility for competition among the record 
companies for market share in the interactive market. SoundExchange PFF 
at ]] 304-305.
---------------------------------------------------------------------------

    \24\ Additionally, there was testimony that directly contradicts 
any suggested generalization that the repertoires of all four majors 
are necessary as a prerequisite prior to undertaking the operation 
of a consumer music service in the various digital music service 
markets. For example, Mr. Roback testified that Yahoo! was able to 
operate its custom radio channels without Universal Music for two 
years, even though Universal may account for nearly one-third of the 
market in terms of repertoire. 11/9/06 Tr. 17:13-21 (Roback).
---------------------------------------------------------------------------

    At the same time, Dr. Jaffe's contention that the interactive 
webcasting benchmark market is highly concentrated on the seller's side 
is not supported by any evidence of a super-competitive impact on 
prices in the benchmark market. Further undermining his contention is 
Dr. Jaffe's own admission that market concentration on one side of the 
market (i.e., among sellers) need not necessarily result in an outcome 
that looks markedly different from a competitive outcome so long as the 
buyers in the same market have comparable market power. SoundExchange 
PFF at ] 196.
    Nor does Dr. Jaffe provide any persuasive evidence to support a 
collusion allegation among the sellers in the interactive webcasting 
benchmark market. SoundExchange PFF at ] 312. And he fails to 
substantiate his claim that the presence of so-called most favored 
nations (``MFN'') clauses in certain agreements in the interactive 
webcasting market is suggestive of anti-competitive behavior. MFN 
clauses are not automatically indicative of tacit collusion--they may 
simply reflect the need for price flexibility in the face of 
uncertainty in long-term contracts.\25\
---------------------------------------------------------------------------

    \25\ At the same time, it should be noted that Dr. Pelcovits did 
review the MFN clauses in the agreements in question and concluded 
they were not anti-competitive or collusive. 5/15/06 Tr. 207:5-16 
(Pelcovits).
---------------------------------------------------------------------------

    In short, Dr. Jaffe's concerns that the benchmark market is not 
sufficiently competitive to be similar to the competitive circumstances 
that prevail in the target hypothetical market amount to little more 
than the theoretical speculations of an academic offering a quick 
outline of possible criticisms without carefully considering the 
applicable facts or alternative explanations. We find that the 
available evidence does not support such a view.
    Apart from his concerns about the competitive comparability of the 
interactive webcasting market benchmark to the hypothetical target 
market, Dr. Jaffe also raises methodological criticisms of the 
projected rate results obtained by Dr. Pelcovits from the latter's use 
of interactive webcasting as a benchmark. While raising interesting 
potential issues, Dr. Jaffe's critique fails in its search for 
persuasive evidence. For example, Dr. Jaffe complains that the 
interactivity adjustment made by Dr. Pelcovits is based on incorrect 
and internally inconsistent assumptions--i.e., the assumption that 
``elasticity at market equilibrium is the same for interactive services 
and non-interactive services.'' Jaffe WRT at 17. First, it should be 
noted that even if Dr. Jaffe's complaint were supported by the record, 
it would not eliminate the interactive webcasting market as an 
appropriate benchmark. As Dr. Pelcovits correctly notes, ``if demand 
elasticity were to differ significantly between the two markets, it 
could increase the copyright fee or decrease it.'' Pelcovits WRT at 36 
n.14. But we are not faced with that difficulty here because the 
available evidence tends to support Dr. Pelcovits' assumption that 
demand elasticities were likely to be very close in the relevant range 
of the demand curves. SoundExchange RFF at ]] 117-118; Pelcovits WRT at 
25-27.

[[Page 24094]]

    Dr. Jaffe also contends that Dr. Pelcovits improperly extrapolates 
fees for non-subscription or ad-supported services from a model based 
entirely on subscription services because subscription services only 
account for a small percentage of non-interactive services. Jaffe WRT 
at 22-24. He says, without empirical support, that this small fraction 
is not representative of all non-interactive listeners. Jaffe WRT at 
22-24. The implication is that ad-supported services are the 
predominant business model now for non-interactive webcasting and that 
ad-supported services would necessarily pay less than subscription 
services to use the same music in their non-interactive services 
because their advertising revenues have not yet grown to the point 
where ad-supported services are more lucrative on a per-listener hour 
basis. However, this criticism, besides providing no information on the 
degree of substitution by consumers between the subscription and non-
subscription options, fails to take into account any improvement in ad-
supported revenues over the term of this licensing period. 
SoundExchange PFF at ]] 320-321, 323-324. Therefore, to the extent that 
ad-supported revenues may not yet have equalized subscription revenues 
on a per-listener hour basis but are expected to grow over the term of 
this applicable license, SoundExchange's proposed phase-in of the per-
performance rates to the level indicated by the benchmark analysis 
represents a wholly reasonable approach to dealing with this potential 
issue.
    Finally, Dr. Jaffe contends that one or more of the key data items 
in Dr. Pelcovits' rate analysis must be incorrect because their strict 
application would produce a negative royalty rate. Jaffe WRT at 20-22. 
But this criticism ignores the profits earned by interactive services, 
or, alternatively, assumes without basis that the same dollar amount of 
profit should be earned by services in the non-interactive market.\26\ 
Jaffe WRT at 20-21; SoundExchange RFF at ]] 122-123. We find no merit 
in this flawed critique.
---------------------------------------------------------------------------

    \26\ Dr. Pelcovits also noted that a negative royalty rate would 
be unlikely to occur in a dynamically adjusting market. Pelcovits 
WRT at 30.
---------------------------------------------------------------------------

    In sum, the Services' objections to the Pelcovits benchmark 
analysis are not persuasive. This does not mean that Dr. Pelcovits' 
analysis and presentation is without any warts. For example, Dr. 
Pelcovits failed to fully account in his written statement for the 
reasoning behind his choice of variables and the functional form used 
in his hedonic model to isolate the value of interactivity to consumers 
of online music services. But for the fact that he subsequently 
provided most of that information orally in response to questions from 
the Copyright Royalty Judges, 5/16/2006 Tr. 267:16-276:14 (Pelcovits), 
such an omission may have led to more serious questions about this 
aspect of his model. And a more comprehensive study of the relative 
price elasticities of demand in the interactive and non-interactive 
webcasting markets would have been a welcome addition to the available 
evidence on this point, even though the available evidence weighed in 
Dr. Pelcovits' favor. On the other hand, the Copyright Royalty Judges 
find that these critiques are not sufficient to undermine the basic 
thrust and conclusions of the Pelcovits benchmark analysis. Moreover, 
as noted supra at Section IV.C.1.b.ii., his analysis benefits from some 
general corroborative evidence.
iv. A Flawed Musical Works Benchmark Offered by Dr. Jaffe
    We have also considered and rejected Dr. Jaffe's offer of 
agreements from the musical works marketplace as a benchmark. This 
benchmark analysis appears to be little more than a hasty attempt to 
revive and rehabilitate some similar arguments that failed to prevail 
in Webcaster I.
    The Copyright Royalty Judges find that the benchmark analysis 
offered by Dr. Jaffe is fatally flawed for several reasons. First, Dr. 
Jaffe's benchmark analysis is based on a marketplace in which, while 
the buyers may be the same as in the target hypothetical marketplace, 
the sellers are different and they are selling different rights. 
Therefore, contrary to Dr. Jaffe's expectations that the prices paid 
for the rights in each respective market dealing with similar rights 
should be the same, substantial empirical evidence shows that sound 
recording rights are paid multiple times the amounts paid for musical 
works rights in the markets for ring tones, digital downloads, music 
videos and clip samples. Pelcovits WRT at 4; Eisenberg WRT at 7-14.
    Second, the Copyright Royalty Judges find that Dr. Jaffe's 
equivalence argument also fails because of his reliance on the 
assumption of ``sunk costs'' as a justification. This assumption must 
be rejected on both theoretical and empirical grounds. Dr. Jaffe claims 
that, while the sellers in his benchmark market are not the same, they 
come to the negotiation from a similar position because in both his 
proposed benchmark market and in the hypothetical target market, the 
costs of producing the underlying intellectual property are ``sunk.'' 
Jaffe WDT at 23. According to Dr. Jaffe, this means ``there is no 
incremental cost imposed on either the musical work or sound recording 
by virtue of making the underlying intellectual property available for 
digital performance.'' \27\ Jaffe WDT at 24. As a matter of theory, Dr. 
Jaffe's proposed benchmark analysis ignores the long-established 
pattern of investment in the recording industry. Thus, not only are 
there some initial sunk investments, but there is a requirement of 
repeated substantial outlays year after year or, in other words, the 
repeated ``sinking'' of funds. If sellers are faced with the prospect 
of not recovering such sunk costs, then the incentive to produce such 
sound recordings is diminished. And the record is replete with evidence 
of a substantially greater investment of this type in sound recordings 
as compared to musical works. SoundExchange PFF at ]] 449-461. 
Furthermore, recording companies will necessarily make future 
investment decisions based on their best estimates of the revenue 
sources available to them in the future from all sources including 
revenue streams derived from the non-interactive webcasting of sound 
recordings.\28\ SoundExchange PFF at ] 478; Brynjolfsson WRT at 6-8. 
Thus, to suggest that they ignore such costs in their approach to 
pricing makes little sense. It would be tantamount to suggesting that 
services such as Yahoo! or AOL or Microsoft would never consider the 
cost of their research and development programs when pricing their 
products.\29\ In short, we decline to accept Dr. Jaffe's ``sunk costs'' 
justification for his proposed benchmark.
---------------------------------------------------------------------------

    \27\ Curiously, at this point in his analysis Dr. Jaffe appears 
to back away from his insistence on a ``competitive'' market because 
to maintain that position would lead to a logically inconsistent 
result in his benchmark analysis. Since, in a perfectly competitive 
market situation, price at equilibrium is equal to marginal cost, 
then, logically, the price for the rights in question could be no 
higher than zero. Therefore, Dr. Jaffe opts for a necessarily 
different undefined market structure by saying that here, even 
though the price should be zero, the resulting royalty would be some 
greater amount apparently determined by the relative bargaining 
power of the buyers and sellers. Jaffe WDT at 26. If this benchmark 
market results in a price that is higher than what is expected under 
perfectly competitive conditions, then clearly the sellers must be 
exercising some degree of market power.
    \28\ In other words, this is not just a static process concerned 
with recouping past investment costs, but a dynamic economic process 
concerned with obtaining greater resources for future creative 
efforts.
    \29\ Indeed, even Dr. Jaffe concedes that the costs of sound 
recordings not yet created are not sunk. 6/28/06 Tr. 99:7-101-7 
(Jaffe).

---------------------------------------------------------------------------

[[Page 24095]]

    Third, there is ample empirical evidence in the record from other 
marketplaces to controvert Dr. Jaffe's premise that the market for 
sound recordings and the market for musical works are necessarily 
equivalent. SoundExchange PFF at ]] 483-495.
    For all these reasons, the Copyright Royalty Judges find that Dr. 
Jaffe's proffered benchmark is not useful to our determination of an 
appropriate benchmark from which to derive applicable rates. We, 
therefore, adhere to the Pelcovits benchmark analysis as a superior 
tool for that purpose.
v. Other Proposed Benchmarks Rejected
    One other benchmark was proposed in this proceeding by a commercial 
party. SBR Creative Media, Inc. claims analog over-the-air broadcast 
music radio as its benchmark, with reference to musical composition 
royalties paid by such broadcasters to the performing rights 
organizations. SBR Creative Media, Inc. Rahn WDT at 11. We find that 
this is virtually the same benchmark as that proposed by Dr. Jaffe on 
behalf of the Services and rejected in Webcaster I. 67 FR 45246-7 (July 
8, 2002). SBR does nothing to remedy the deficiencies from which this 
proposed benchmark was shown to suffer in Webcaster I. Furthermore, 
this proposed benchmark suffers from the same deficiencies we find 
fatal with respect to Dr. Jaffe's proposed benchmark discussed supra at 
Section IV.C.1.b.iv. For all these reasons, the Copyright Royalty 
Judges find that the SBR Creative Media, Inc. proffered benchmark is 
not useful to our determination of an appropriate benchmark from which 
to derive applicable rates and, therefore, adhere to the Pelcovits 
benchmark analysis as a superior tool for that purpose.
c. Conclusion: The Interactive Webcasting Market Benchmark Provides the 
Best Benchmark for Setting Commercial Rates Without Further Adjustment 
for Either Substitution or Promotion Factors or the Relative 
Contributions Made by the Copyright Owners and Webcasting Services in 
Bringing the Copyrighted Works and the Services to the Public
    As discussed supra at Section IV.C.1.a., the ``willing buyer/
willing seller standard'' in the Copyright Act encompasses 
consideration of economic, competitive and programming information 
presented by the parties, including (1) the promotional or substitution 
effects of the use of webcasting services by the public on the sales of 
phonorecords and (2) the relative contributions made by the copyright 
owner and the webcasting service with respect to creativity, 
technology, capital investment, cost and risk in bringing the 
copyrighted work and the service to the public. Because we adopt a 
benchmark approach to determining the rates, we agree with Webcaster I 
that such considerations ``would have already been factored into the 
negotiated price'' in the benchmark agreements. 67 FR 45244 (July 8, 
2002). Therefore, such considerations have been reviewed by the 
Copyright Royalty Judges in our determination of the most appropriate 
benchmark from which to set rates. Nevertheless, we have also further 
reviewed the evidence bearing on these considerations to determine if 
the benchmark agreements require any further adjustment based on any 
evidence of differences between the benchmark market and the target 
hypothetical market.
    We find that no further adjustment is necessary to the Pelcovits 
benchmark analysis to account for any of these considerations. Dr. 
Pelcovits explicitly examined the promotion and substitution issues and 
ultimately found no empirical evidence to suggest a net substitution/
promotion difference between the interactive and the non-interactive 
marketplaces. Pelcovits WRT at 17-27. Because only the relative 
difference between the benchmark market and the hypothetical target 
market would necessitate an adjustment, the absence of solid empirical 
evidence of such a difference obviates the need for such further 
adjustment. Furthermore, even if the absolute levels of promotion/
substitution in the non-interactive market alone were somehow relevant, 
as the Services appear to suggest, we find that the Services presented 
no acceptable empirical basis for quantifying promotion/substitution 
for purposes of adjusting rates in that market.\30\
---------------------------------------------------------------------------

    \30\ For example, the Radio Broadcasters strenuously assert that 
over-the-air-radio is promotional and therefore that simulcasting 
must be promotional. But they present no persuasive evidence that 
would be useful for quantifying the magnitude of this asserted 
effect either for over-the-air-radio or for non-interactive 
webcasting and deriving a method for translating such magnitudes 
into a rate adjustment. Indeed, the quality of evidence presented by 
the Services on this issue consisted largely of assertions, 
recollections of conversations clearly evidencing common ``puffing'' 
in a business context, or anecdotes recounting subjective opinions. 
On a similar record, Webcaster I found no basis for a downward 
adjustment of the simulcast rate to account for the promotional 
value associated with over-the-air broadcasts because the net impact 
was indeterminate. 67 FR 45255 (July 8, 2002).
---------------------------------------------------------------------------

    Similarly, the parties' evidence with respect to the relative 
contributions made by the copyright owner and the webcasting service 
with respect to creativity, technology, capital investment, cost and 
risk in bringing the copyrighted work and the service to the public 
does not persuade us that any further adjustment needs to be made to 
the Pelcovits benchmark to account for quantifiable differences related 
to these factors. We find that such factors are implicitly accounted 
for in the rates that result from negotiations between the parties in 
the benchmark marketplace. Moreover, because only the relative 
difference between the benchmark market and the hypothetical target 
market would necessitate an adjustment, the absence of solid empirical 
evidence of such a difference obviates the need for such further 
adjustment.
    Finally, the Radio Broadcasters seek to differentiate their 
simulcasting operations from the operations of other commercial 
webcasters and, thereby, obtain a different, lower royalty rate. The 
record before us fails to persuade us that these simulcasters operate 
in a submarket separate from and non-competitive with other commercial 
webcasters. Indeed, there is substantial evidence to the contrary in 
the record indicating that commercial webcasters such as those 
represented by DiMA in this proceeding and simulcasters such as those 
represented by Radio Broadcasters in this proceeding regard each other 
as competitors in the marketplace. SoundExchange PFF at ]] 1107-1110. 
Therefore, the Copyright Royalty Judges do not find a basis for setting 
a different, lower rate for these simulcasters as compared to other 
commercial webcasters. Webcaster I, at 67 FR 45255, 45272 (July 8, 
2002), reached a similar conclusion in finding no basis for treating 
these simulcasters any differently with respect to the per performance 
commercial rate, and we find no facts to persuade us of a change in 
circumstance since then.
d. Rates and Minimum Fees Applicable to Commercial Webcasters
i. Determination of Per Play Rates for Commercial Webcasters
    Because we find that the interactive webcasting market is a 
benchmark with characteristics reasonably similar to non-interactive 
webcasting, particularly after Dr. Pelcovits' final adjustment for the 
difference in interactivity, the Copyright Royalty Judges find that 
this benchmark supports the explicit annual usage rates \31\ proposed 
by

[[Page 24096]]

SoundExchange. Therefore, we find that the per play rate applicable to 
each year of the license for Commercial Webcasters \32\ is as follows: 
a per play rate of $.0008 for 2006, a per play rate of $.0011 for 2007, 
a per play rate of $.0014 for 2008, a per play rate of $.0018 for 2009 
and a per play rate of $.0019 for 2010.\33\
---------------------------------------------------------------------------

    \31\ For the reasons indicated supra at Section IV.B.1, only 
usage rates are determined.
    \32\ Commercial Webcasters include such licensees who are 
eligible nonsubscription transmission services or new subscription 
services, irrespective of whether they transmit music in large part 
or in small part.
    \33\ The Judges recognize that a smooth transition from the 
prior fee regime to the new fee structure adopted by the Judges 
hereinabove may be aided by permitting the limited use of an ATH 
calculation option. Such a transition option enhances the ability of 
some Services to effectuate speedy payments and, in so doing, 
improves the ability of copyright owners to more quickly obtain 
monies due. In short, such a transition measure is reasonably 
calculated to facilitate a smooth, speedy transition to the new fee 
structure adopted hereinabove by the Judges. Therefore, the usage 
fee structure established in this Final Determination will continue 
use of an ATH option for timely payment of fees due for the years 
2006 and 2007. See table near footnote 33 reference.
    The following Aggregate Tuning Hours (ATH) usage rate 
calculation options will be available for the transition period of 
2006 and 2007: Note: [See table for footnote 33 above] where ``Non-
Music Programming'' is defined as Broadcaster programming reasonably 
classified as news, talk, sports or business programming; 
``Broadcast Simulcast Programming'' is defined as Broadcaster 
simulcast programming not reasonably classified as news, talk, 
sports or business programming; and ``Other Programming'' is defined 
as programming other than either Broadcaster simulcast programming 
or Broadcaster programming reasonably classified as news, talk, 
sports or business programming.

----------------------------------------------------------------------------------------------------------------
                                                          Broadcast simulcast
                                     Other programming        programming            Non-music  programming
----------------------------------------------------------------------------------------------------------------
Prior Fees.......................  $0.0117 per ATH.....  $0.0088 per ATH.....  $0.0008 per ATH.
2006.............................  $0.0123 per ATH.....  $0.0092 per ATH.....  $0.0011 per ATH.
2007.............................  $0.0169 per ATH.....  $0.0127 per ATH.....  $0.0014 per ATH.
----------------------------------------------------------------------------------------------------------------
Note: See footnote 33

    We find no basis for making further adjustments to this usage rate 
to reflect inflation \34\ or bundling.\35\
---------------------------------------------------------------------------

    \34\ We do not find that the benchmark supports an additional 
Consumer Price Index adjustment to the usage rate in 2010. No 
evidence has been submitted by SoundExchange to support this 
additional adjustment by what is, at this point in time, an 
indeterminate amount.
    \35\ We find that a usage rate is more directly reflective of 
the rights being licensed than other alternative rate metrics. See 
supra at Section IV.B. Moreover, the evidence presented fails to 
persuade us that receiving a music service as part of a bundle of 
services necessarily results in a higher valuation of that music 
service by the consumer than if it had been delivered as a non-
bundled service. For example, SoundExchange's claim for an uplifted 
rate for bundled services is supported by only one custom radio 
agreement addressing bundled services and that agreement is 
specifically identified by its expert, Dr. Pelcovits, as part of a 
class of agreements that are ``not a good benchmark.'' Pelcovits WRT 
at 35 n.43. Therefore, we find no sufficient basis upon which to 
determine a different usage rate for bundled services as compared to 
non-bundled services.
---------------------------------------------------------------------------

    We are persuaded by the evidence in the record to apply these usage 
rates without any further adjustment for wireless transmission to all 
Commercial Webcasters. While SoundExchange's proposed rates included a 
25% premium for ``wireless services,'' the Copyright Royalty Judges 
find no persuasive basis in the record for such a so-called ``mobility 
premium.'' The proposed wireless premium was not grounded on the 
Pelcovits benchmark analysis that underlies SoundExchange's primary 
rate proposal. Indeed, Dr. Pelcovits specifically declined to do so 
because of the absence of any data on mobile interactive services. 
Pelcovits WDT at 60-61. The alternative data offered by Dr. Pelcovits 
on this issue is not persuasive. Most of the relatively limited data he 
offers fails to address salient differences between the markets and 
products represented by that data and the non-interactive webcasting 
market and its product offerings. In addition, SoundExchange fails to 
provide any persuasive evidence that a music service delivered to a 
tethered laptop computer via the Internet is valued differently in the 
marketplace than the same music service delivered to a laptop computer 
via the Internet over private or public wireless Internet networks 
using Wireless Fidelity (``WiFi'') technology. SoundExchange's proposal 
to exempt wireless transmissions over ``personal, short range 
residential networks'' from its proposed wireless premium also 
underlines its own recognition of the absence of a difference. 
SoundExchange's Revised Rate Proposal (filed September 29, 2006) at 7. 
Therefore, on the record before us, we do not find a sufficient basis 
to support a proposed premium for the wireless transmission of non-
interactive webcasts.\36\
---------------------------------------------------------------------------

    \36\ We are also troubled by SoundExchange's proposal to apply 
the wireless premium even in cases where the service cannot 
``distinguish between transmissions to wireless devices and fixed 
line devices.'' This proposal is not supported by any evidence that 
a presumption of ``wireless'' transmission ought to apply. To the 
contrary, SoundExchange's own witness, James Griffin admits that, at 
least in some cases, webcasters simply may not be able to 
distinguish between transmissions to wireless devices and fixed line 
devices. Griffin WDT at 32.
---------------------------------------------------------------------------

ii. Determination of Minimum Fee for Commercial Webcasters
    Under 17 U.S.C. 114(f)(2)(B), the Copyright Royalty Judges are 
directed to set a minimum fee for each type of service. SoundExchange 
points out that the Webcaster I CARP noted that one purpose of the 
minimum fee was to ``protect against a situation in which a licensee's 
performances are such that it costs the license administrator more to 
administer the license than it would receive in royalties'' and another 
purpose was ``to capture the intrinsic value of the licensee's access 
to the full blanket license, irrespective of whether the service 
actually transmits any performances.'' SoundExchange PFF at ] 1349. We 
find no evidence in the record that establishes an amount for such an 
``intrinsic value'' and, therefore, focus on the administrative cost 
issue. Here again, we are provided with little evidence of the 
administrative cost per licensee,\37\ especially for a webcaster who 
may be generating few royalties. The benchmark marketplace agreements 
generally provide for substantial advance annual minimum fees that are 
non-refundable, but recoupable against future royalties. As compared to 
these amounts, SoundExchange's proposal of an annual non-refundable, 
but recoupable $500 minimum per channel or station payable in advance 
is a substantially smaller amount. SoundExchange Revised Rate Proposal 
(filed September 29, 2006). Even though its proposed minimum fee is 
low, SoundExchange must anticipate that it will cover its 
administrative costs even in the absence of royalties. Therefore, we 
find SoundExchange's minimum annual fee proposal is reasonable and

[[Page 24097]]

applicable to Commercial Webcasters.\38\ Moreover, since this flat 
dollar minimum fee is not adjusted over the term of the license to 
reflect the impact of inflation, this minimum fee is likely to have a 
declining financial impact on the costs of the Services over the term 
of the license. Therefore, we determine that a minimum fee of an annual 
non-refundable, but recoupable $500 minimum per channel or station \39\ 
payable in advance is reasonable over the term of this license.
---------------------------------------------------------------------------

    \37\ At the same time, there is evidence that the royalty 
collection and distribution operations performed by SoundExchange 
consist of substantial work, such as processing payments and reports 
of use, matching information received from licensees with 
information on copyright owners and performers, undertaking related 
research and quality assurance work, allocating and distributing 
royalties and resolving errors or disputes. See Kessler WDT at 3-16.
    \38\ Webcaster I found a $500 minimum annual fee per licensee to 
be reasonable in light of the CARP's reasoning that the RIAA would 
not have negotiated a minimum fee that failed to cover at least its 
administrative costs. 67 FR 45262-3 (July 8, 2002). In the agreement 
to push forward rates and terms in 2003, commercial webcasters and 
SoundExchange agreed that minimum annual fees would equal $2500, or 
$500 per channel or station, but in no event less than $500 per 
licensee. 37 CFR 262.3(d)(2). Again, it is reasonable to anticipate 
that SoundExchange would not have negotiated a minimum fee that 
failed to cover at least its administrative costs.
    \39\ This $500 minimum fee is applicable to each individual 
station and each individual channel, including each individual 
``side channel'' maintained by broadcasters. ``Side channels'' are 
channels on the website of a broadcaster that transmit eligible 
transmissions that are not simultaneously transmitted over-the-air 
by the broadcaster. Thus, a broadcaster who transmits one simulcast 
over the Internet and also transmits an eligible transmission over 
one side channel is subject to a minimum fee of $500 for each 
respective transmission, for a total in this example of $1,000. In 
other words, the minimum fee is separately applicable to each side 
channel. We find no basis in the record for distinguishing between 
side channels and other stations or channels with respect to a 
minimum fee that reflects the costs of license administration. We 
have found, hereinabove, that SoundExchange's proposal of a $500 
minimum fee for such administration is clearly reasonable. Further, 
such administration costs will align more clearly with per station 
or per channel reports of use where such reports of use are 
submitted in satisfaction of recordkeeping requirements.
---------------------------------------------------------------------------

2. Noncommercial Webcasters
a. The Willing Buyer/Willing Seller Standard Revisited
    As previously noted hereinabove, supra at Section IV.A., the 
Copyright Act requires that the Copyright Royalty Judges establish 
rates for the section 114 performance license that ``most clearly'' 
represent those ``that would have been negotiated in the marketplace 
between a willing buyer and a willing seller.'' Both copyright owners 
and noncommercial services agree that the best approach to determining 
what rates would apply in such a hypothetical marketplace is to look to 
comparable marketplace agreements as ``benchmarks'' indicative of the 
prices to which willing buyers and willing sellers in this marketplace 
would agree. However, the copyright owners and the noncommercial 
services disagree on an appropriate benchmark.
    The copyright owners insist there is no basis to apply a benchmark 
other than that used in the commercial market; and consequently, they 
maintain that the rates supported by the interactive benchmark analysis 
apply with equal force to Commercial and Noncommercial Webcasters. 
SoundExchange's Revised Rate Proposal (filed September 29, 2006). The 
Noncommercial Webcasters, on the other hand, maintain that they are 
distinguishable from commercial services and, as such, require a 
different, lower rate. In effect, they claim to be different buyers 
and, hence, a different benchmark should be consulted. Joint 
Noncommercial PFF \40\ at ] 10; Joint Proposed Findings of IBS and WHRB 
at 9-15. The Noncommercial Webcasters propose lower rates, described 
supra at Section IV.B.2., based on several alternative benchmarks-(1) 
the musical works rates applicable to over-the-air broadcasting 
pursuant to section 118 of the Copyright Act and (2) rates loosely 
related to the 2001 NPR-SoundExchange agreement which covered streaming 
from 1998 to 2004 (SERV-D-X 157). Joint Noncommercial PFF at ] 35; 
NRBNMLC PFF at ] 52.
---------------------------------------------------------------------------

    \40\ The ``Joint Noncommercial Proposed Findings of Fact and 
Conclusions of Law'' were submitted by National Public Radio, 
Corporation For Public Broadcasting-Qualified Stations, the National 
Religious Broadcasters Noncommercial Music License Committee 
(``NRBNMLC''), and Collegiate Broadcasters, Inc.
---------------------------------------------------------------------------

    Based on the available evidence, we find that, up to a point, 
certain ``noncommercial'' webcasters may constitute a distinct segment 
of the non-interactive webcasting market that in a willing buyer/
willing seller hypothetical marketplace would produce different, lower 
rates than we have determined hereinabove for Commercial Webcasters. A 
segmented marketplace may have multiple equilibrium prices because it 
has multiple demand curves for the same commodity relative to a single 
supply curve. An example of a segmented market is a market for 
electricity with different prices for commercial users and residential 
users. In other words, price differentiation or price discrimination is 
a feature of such markets. The multiple demand curves represent 
distinct classes of buyers and each demand curve exhibits a different 
price elasticity of demand. By definition, if the commodity in question 
derives its demand from its ultimate use, then the marketplace can 
remain segmented only if buyers are unable to transfer the commodity 
easily among ultimate uses. Put another way, each type of ultimate use 
must be different.\41\
---------------------------------------------------------------------------

    \41\ See for example, Burkett, John P., Microeconomics: 
Optimization, Experiments and Behavior, (Oxford University Press, 
2006) at 162 for an introductory microeconomic description of price 
discrimination. Typically, the submarket characterized by lesser 
price elasticity will exhibit a higher price. All the economists who 
testified in this proceeding for both the Services and the copyright 
owners generally agreed with this description. See, for example, 5/
16/06 Tr. 222:19-223:5 (Pelcovits); 11/21/06 Tr. 14:20-15:11 
(Brynjolfsson); 11/8/06 Tr. 63:4-64:8 (Jaffe); Picard WRT at 2-7, 
11/13/06 Tr. 191:5-196:1 (Picard). For an introductory discussion of 
price discrimination in copyright markets, see Congressional Budget 
Office, Copyright Issues in Digital Media, August 2004 at 23-24 or 
Landes, William M. and Richard A. Posner, the Economic Structure of 
Intellectual Property Law, (Cambridge, MA: The Belnap Press of the 
Harvard University Press, 2003) at 374-78, 389-90.
---------------------------------------------------------------------------

    Certainly, there is a significant history of Noncommercial 
Webcasters such as NPR and the copyright owners reaching agreement on 
rates that were substantially lower than the applicable commercial 
rates over the corresponding period. See, for example, the 2001 NPR-
SoundExchange agreement which covered streaming from 1998 to 2004 
(SERV-D-X 157). And, even though SoundExchange offers no formal 
proposal exempting any Noncommercial Webcasters from its proposed 
commercial rates, its own economic expert suggests a continuation of 
differentiated rates where the service offered by such Noncommercial 
Webcasters does not appear to pose any threat of making serious inroads 
into the business of those services paying the commercial rate. 
Brynjolfsson WRT at 42. Dr. Brynjolfsson suggests a cap on listeners 
beyond which Noncommercial Webcasters would no longer enjoy the lower 
rate in order to reduce ``the chance that small noncommercial stations 
will cannibalize the webcasting market more generally'' and thereby 
adversely affect the value of the digital performance right in sound 
recordings. Id. SoundExchange does not disavow Dr. Brynjolfsson's 
testimony on this point, even citing it in its proposed findings of 
fact. In short, SoundExchange can itself envision circumstances under 
which a continuation of some regime of differentiated prices would 
continue.
    The Copyright Royalty Judges also can envision such circumstances. 
But, as a matter of pure economic rationale based on the willing buyer/
willing seller standard, those circumstances undoubtedly must include 
safeguards to assure that, as the submarket for noncommercial 
webcasters that can be distinguished from commercial webcasters 
evolves, it does not simply converge or overlap with the submarket

[[Page 24098]]

for commercial webcasters and their indistinguishable noncommercial 
counterparts.
    The Copyright Royalty Judges have reached this view after a careful 
consideration of the characteristics that help to delineate the 
noncommercial submarket, juxtaposed against evidence in the record that 
those characteristics may be changing for at least some members of the 
submarket. For example, the noncommercial broadcasters cite a myriad of 
characteristics that they claim set them apart from commercial 
broadcasters. Noncommercial licensees are non-profit organizations. 
Johnson WDT at ] 5; Papish WDT at ]] 4, 12; Robedee WDT at ] 2; 6/27/06 
Tr. 63:1-21 (Stern); 8/7/06 Tr. 13:11-17, 21:10-12 (Kass). The 
noncommercial webcasters' mission is to provide educational, cultural, 
religious and social programming not generally available on commercial 
venues. See, for example, Stern WDT at 4 and 8/1/06 Tr. 21:11-22:1 
(Johnson). Noncommercial webcasters have different sources of funding 
than ad-supported commercial webcasters-such as listener donations, 
corporate underwriting or sponsorships, and university funds. Joint 
Noncommercial PFF at ] 20. The implication is that noncommercial 
webcasters do not compete with commercial webcasters. But as webcasting 
has developed, some of these traits have become blurred. Public and 
collegiate radio stations no longer necessarily face a limited 
geographic audience, but rather their music programming is 
geographically unbounded so that such stations may compete with 
commercial webcasters even ``worldwide.'' SoundExchange PFF at ]] 1105, 
1185. Some college radio stations use the Live365 service to stream 
their simulcasts, making them just another consumer choice available on 
Live365 together with numerous commercial stations. SoundExchange PFF 
at ] 1186. Commercial Webcasters view Noncommercial Webcasters as 
competition for an audience interested in listening to music. 
SoundExchange PFF at ] 1116. And some Noncommercial Webcasters, such as 
NPR, may view Commercial Webcasters as their competition for audience 
as well. SoundExchange PFF at ] 1170. Some noncommercial stations have 
adopted programming previously found on commercial stations for use on 
noncommercial side channels or expanding the use of side channels as 
music outlets. SoundExchange PFF at ]] 1117, 1123. Music programming 
found on noncommercial stations competes with similar music programming 
found on commercial stations. SoundExchange PFF at ] 1122, 
SoundExchange RFF at ] 284. Sponsorships appear to monetize webcasting 
in a fashion similar to advertising. SoundExchange PFF at ]] 1130, 
1134, 1166. Some noncommercial stations use the functional equivalent 
of marketing materials that emphasize the size, income and demographics 
of their audience in much the same manner that commercial stations make 
their advertising sales pitches. SoundExchange PFF at ]] 1135, 1142. In 
other words, as webcasting has evolved, some convergence between some 
noncommercial webcasters and commercial webcasters can be observed 
ultimately resulting in competition for audience. Brynjolfsson WRT at 
40-41. To the extent such competition occurs, market segmentation 
breaks down, obviating the need for a separate lower royalty rate.
b. Proposed Benchmarks and Other Relevant Evidence
    The copyright owners take the position that the same benchmark 
applies to the noncommercial and the commercial services in the 
marketplace. Consequently, they maintain that the rates supported by 
the interactive benchmark analysis discussed supra at Section 
IV.C.1.b.i. apply with equal force to Commercial and Noncommercial 
Webcasters. Because we have found that, up to a point, 
``noncommercial'' webcasters, may constitute a segment of the non-
interactive webcasting market that in a willing buyer-willing seller 
hypothetical marketplace would produce different, lower rates than we 
have determined hereinabove for Commercial Webcasters, we necessarily 
find that the benchmark proposed by the copyright owners is applicable 
to only some Noncommercial Webcasters (i.e., those that cannot be 
clearly distinguished from their commercial counterparts). In other 
words, the copyright owners' benchmark does not apply to those 
Noncommercial Webcasters that can be said to constitute a distinct 
submarket in the non-interactive marketplace. The interactive market 
benchmark analysis is based on agreements in which all of the services 
are Commercial Webcasters. There are no agreements that form part of 
that analysis that would adequately gauge what a Noncommercial 
Webcaster in a distinctly different submarket would be willing to pay 
as a willing buyer for the rights at issue in this proceeding.
    The Noncommercial Webcasters offer several alternative benchmarks 
applicable to all noncommercial Services without distinction as well: 
(1) The musical works rates applicable to over-the-air broadcasting 
pursuant to section 118 of the Copyright Act and (2) rates loosely 
related to the 2001 NPR-SoundExchange agreement which covered streaming 
from 1998 to 2004 (SERV-D-X 157). We find neither of these approaches 
adequately deals with the segmented marketplace.
    First, the Noncommercial Webcasters would apply the rates 
determined using their benchmarks to all noncommercial Services, 
irrespective of whether they were part of a submarket in the 
marketplace for non-interactive webcasting that was distinctly 
different from commercial non-interactive webcasting.
    Second, even within a distinctly different submarket, the 
benchmarks proposed by the Noncommercial Webcasters suffer from serious 
flaws. For example, the musical works benchmark proposed by the 
Services is based on a very different marketplace characterized by 
different sellers who are selling different rights. Then too, as 
previously discussed, there is ample evidence in the record from other 
relevant marketplaces to controvert the underlying premise of this 
proposed benchmark that the market for sound recordings and the market 
for musical works are necessarily equivalent. SoundExchange PFF at ]] 
483-495. Similarly, the 2001 NPR-SoundExchange agreement covering 
streaming from 1998 to 2004 does not provide clear evidence of a per 
station rate that could be viewed as a proxy for one that a willing 
buyer and a willing seller would negotiate today--it provided for a 
lump sum amount to cover the entire 74-month term of the contract with 
no amount specified for different years, and there is nothing in the 
contract or the record to indicate the parties' expectations as to 
levels of streaming or the proper attribution of payments for any given 
year or how additional stations beyond the 410 covered by the agreement 
were to be handled. Moreover, the transformation of this proposed 
benchmark by the offering service, the NRBNMLC, into proposed rates 
adds further problems. In NRBNMLC PFF at ] 57, the entire lump sum 
payable under the 2001 NPR-SoundExchange agreement is divided by 798 
stations to arrive at an estimated annual fee of less than $60 per 
station. But, as previously noted, the agreement in question covered 
only about half as many stations (410) and dividing the stated lump sum 
by 410 stations over the stated 74-month term of the agreement would 
yield a per station rate

[[Page 24099]]

twice the amount calculated by NRBNMLC. Furthermore, NRBNMLC's 
calculation does not add any adjustment for the time value of money in 
the latter years of the contract\42\ nor add any adjustment to account 
for the erosion in the purchasing power of the dollar since 2004.\43\ 
Finally, none of the final rate proposals \44\ of the Noncommercial 
Webcasters would cover the minimum annual fee determined for Commercial 
Webcasters.
---------------------------------------------------------------------------

    \42\ Receiving the 2003 and 2004 fees well in advance of the 
year earned is more valuable to the recipient because it can be 
invested and earn interest that would not be available if paid when 
actually due.
    \43\ Purchasing power loss is complicated by the lack of 
attribution of amounts to particular years in the contract. Thus, 
the amount calculated by the NRBNMLC may be, at best, an average for 
the period. Therefore, a higher amount than that average would be 
the proper target for adjustment for the erosion in purchasing power 
since 2004.
    \44\ CBI's final proposed fees ranged from $25 to $175 per 
station; the NRBNMLC's proposed fees ranged up to $200 per simulcast 
but with up to two associated channels subsumed within that amount. 
NPR's proposed fees were $80,000 to cover at least 798 NPR stations 
(and an undetermined number of CPB stations) or approximately $100 
per station.
---------------------------------------------------------------------------

    In short, we find neither SoundExchange's proposals based on its 
benchmark nor the Noncommercial Webcasters' proposals based on their 
suggested benchmarks adequate to provide a basis for determining the 
rates to be applicable to that part of the noncommercial market for 
non-interactive webcasting that can be identified as a distinct 
submarket from the commercial market. However, we observe that 
certainly the bare minimum that such services should have to pay is the 
administrative cost of administering the license. There is no evidence 
in the record to suggest that the submarket in which a Noncommercial 
Webcaster may reside would yield a different administrative cost for 
SoundExchange as compared to the administrative costs associated with 
Commercial Webcasters and SoundExchange, notably, makes no distinction 
between webcasters with respect to the $500 minimum fee. Webcaster I 
affirmed the notion that all webcasters--all Noncommercial Webcasters 
as well as all Commercial Webcasters--should pay the same minimum fee 
for the same license. 67 FR 45259 (July 8, 2002). We also find no basis 
in the record for distinguishing between Commercial Webcasters and 
Noncommercial Webcasters with respect to the administrative cost of 
administering the license.\45\ Therefore, we determine that a minimum 
fee of an annual non-refundable, but recoupable $500 minimum per 
channel or station \46\ payable in advance is reasonable over the term 
of this license.
---------------------------------------------------------------------------

    \45\ Moreover, even in the musical works benchmark market 
proposed by some Services such as the NRBNMLC, the minimal amount 
that a webcaster paid to cover the combined works administered by 
the three PROs was $636 for college stations in 2006 and $1135 for 
other public broadcasting entities--that is more than the minimum 
rate for a single station determined for the section 114 license 
hereinabove. For a similar analogy, see Webcaster I, 67 FR 45259 
(July 8, 2002).
    \46\ This $500 minimum fee is applicable to each individual 
station and each individual channel, including each individual 
``side channel'' maintained by broadcasters. ``Side channels'' are 
channels on the website of a broadcaster that transmit eligible 
transmissions that are not simultaneously transmitted over-the-air 
by the broadcaster. Thus, a broadcaster who transmits one simulcast 
over the Internet and also transmits an eligible transmission over 
one side channel is subject to a minimum fee of $500 for each 
respective transmission, for a total in this example of $1,000. In 
other words, the minimum fee is separately applicable to each side 
channel. We find no basis in the record for distinguishing between 
side channels and other stations or channels with respect to a 
minimum fee that reflects the costs of license administration. We 
have found, hereinabove, that SoundExchange's proposal of a $500 
minimum fee for such administration is clearly reasonable. Further, 
such administration costs will align more clearly with per station 
or per channel reports of use where such reports of use are 
submitted in satisfaction of recordkeeping requirements.
---------------------------------------------------------------------------

    Because this minimum fee of $500 is meant to cover administrative 
costs, it does not address actual usage. Therefore, it would be 
reasonable to add at least the bare minimum suggested by the Services' 
proposals as payment for usage to the $500 minimum fee for 
administration. However, based on the available evidence, we find that 
past practice has been to treat the minimum fee as recoupable against 
usage charges. Therefore, we have no basis upon which to add a usage 
element that is not recoupable to the minimum fee for this distinctive 
submarket of noncommercial webcasters. Moreover, we note that this 
minimum fee corresponds to the $500 original fee proposal of IBS and, 
therefore, demonstrates that, at least for some webcasters in the 
relevant submarket, the $500 amount represented a ceiling beyond which 
they would not be willing buyers. Kass WDT at Exhibit A.
    We turn next to the derivation of a cap to delineate the boundaries 
of the submarket for which the effective $500 flat fee rate will apply.
c. Cap To Delineate Submarket and Rates and Minimum Fees Applicable to 
the Various Noncommercial Webcasters
    Because there is evidence in the record that some Noncommercial 
Webcasters typically have a listenership of less than 20 simultaneous 
listeners--see, for example 8/2/06 Tr. 137 (Robedee) and 8/2/06 Tr. 243 
(Willer)--Dr. Brynjolfsson suggests a cap of 20 simultaneous listeners 
(or about 14,600 ATH \47\ per month) as the boundary for the 
noncommercial webcasting submarket to be subject to a lower rate.\48\ 
At this level of operation, such a small Noncommercial Webcaster could 
not be viewed as a serious competitor for commercial enterprises in the 
webcasting marketplace. We find Dr. Brynjolfsson's suggested line of 
demarcation too limiting. Size here is only a proxy that aims to 
capture the characteristics that delineate the noncommercial submarket. 
See our consideration of these characteristics supra at Section IV.C.2. 
And, there is evidence in the record that some larger Noncommercial 
Webcasters, such as the typical NPR station extant in 2004, may also be 
distinguished from Commercial Webcasters. Indeed, the evidence of 
convergence in the record appears to apply more clearly to the stations 
at the larger end of the range of NPR station size. See, for example, 
SoundExchange PFF at ] 1122, SoundExchange RFF at ] 284.
---------------------------------------------------------------------------

    \47\ Aggregate Tuning Hours or ATH refers to the total hours of 
programming transmitted to all listeners during the relevant time 
period. Thus, one hour of programming transmitted to 20 simultaneous 
listeners would produce 20 aggregate tuning hours or 20 ATH. The 
number of ATH in a month could be calculated by multiplying the 
average number of simultaneous listeners by the average potential 
listening hours in a month or 730 (i.e., 365 days in a year 
multiplied by 24 hours in a day then divided by 12 months). Applying 
this calculation to an average of 20 simultaneous listeners yields 
14,600 ATH per month.
    \48\ In contrast, the original IBS proposal had a cap of 146,000 
ATH below which an annual per station rate of $500 would apply. Kass 
WDT at Exhibit A.
---------------------------------------------------------------------------

    The 2001 NPR-SoundExchange agreement covered the typical NPR 
webcasting station at a rate substantially less than the rate that 
applied to Commercial Webcasters as of 2004. Based on the available 
evidence, the typical NPR station in 2004, then, would not have been 
treated as the functional equivalent of a commercial station. This is 
significant because the latest available data on what might constitute 
a typical NPR streaming station consists of a survey of NPR stations 
undertaken in 2004. See SoundExchange Trial Ex. 67 (NPR Digital Music 
Rights Station Survey, 2004). According to that survey, the NPR 
stations averaged 218 simultaneous streaming listeners per station (or 
the equivalent of 159,140 ATH per month). This average (218) or a 
lesser number of listeners was exhibited by 80% of all of the NPR 
stations engaged in streaming that responded to the survey--in short, 
it encompassed the experience of all but a handful of NPR stations 
positioned at the extreme high end of the listenership

[[Page 24100]]

distribution.\49\ See SoundExchange Trial Ex. 67 (NPR Digital Music 
Rights Station Survey, 2004) at CRB-NPR000036, CRB-NPR000054-57. 
Therefore, we find that a cap structured to include the typical NPR 
experience that was viewed by the parties as not being subject to 
commercial rates, results in a cap of 159,140 ATH per month.
---------------------------------------------------------------------------

    \49\ The reason the average (218) or a lesser number encompassed 
so many stations is that several very large stations at the upper 
end of the distribution influenced the average. This is 
statistically apparent from a comparison of the average (218) with 
the median number of simultaneous listeners (50).
---------------------------------------------------------------------------

    Again, we stress that this cap is only a proxy for assessing the 
convergence point between Noncommercial Webcasters and Commercial 
Webcasters in order to delineate a distinct noncommercial submarket in 
which willing buyers and willing sellers would have a meeting of the 
minds that would result in a lower rate than the rate applicable to the 
general commercial webcasting market.\50\ Mere size alone, without 
evidence of the other characteristics that define membership in the 
noncommercial submarket discussed supra at Section IV.C.2.a., does not 
make a webcaster eligible for this lower rate. Members of this 
noncommercial submarket, by definition, are not serious competitors 
with Commercial Webcasters.\51\
---------------------------------------------------------------------------

    \50\ The Services also advance various public policy 
considerations which they maintain militate in favor of lower rates. 
However, the Copyright Act is clear that we are required to apply a 
willing buyer/willing seller standard in determining rates for all 
types of participants in the marketplace. We decline to deviate from 
this standard. We further decline to usurp the authority of Congress 
to consider potential public policy concerns and, if it chooses, to 
establish special nonmarket rates for certain noncommercial 
services.
    \51\ On the other hand, a Commercial Webcaster with an audience 
of less than 219 simultaneous listeners is, nothwithstanding its 
size, a direct competitor to other Commercial Webcasters.
---------------------------------------------------------------------------

    A careful review of the record also does not persuade us to make 
any further adjustment to the lower $500 per station rate described 
hereinabove to account for such considerations as (1) the promotional 
or substitution effects on CD sales of webcasting by members of the 
noncommercial submarket or (2) the relative contributions made by 
copyright owners and webcasting services with respect to creativity, 
technology, capital investment, cost and risk. There is no showing of a 
quantitative effect of these considerations that is not already 
embraced within the lower rate we have set. Furthermore, inasmuch as 
that lower rate is also encompassed by the minimum fee necessary to 
support administration of the license, no showing has been made by any 
Noncommercial Webcaster that such administrative costs are somehow 
overborne by such considerations. Similarly, with respect to the higher 
rate (i.e., the Commercial Webcaster rate) applicable to Noncommercial 
Webcasters above the monthly 159,140 ATH cap, we find that no further 
adjustment is required for the same reasons that we found no such 
adjustment necessary for Commercial Webcasters subject to the 
commercial rate we set. See supra at Section IV.C.1.c.
    In summary, first, we determine that the minimum fee applicable to 
Noncommercial Webcasters is an annual non-refundable, but recoupable 
\52\ $500 minimum per channel or station payable in advance. In other 
words, we find no basis for distinguishing between Commercial 
Webcasters and Noncommercial Webcasters with respect to the minimum 
fee. See supra at Section IV.C.2.b and Section IV.C.2.c. Second, the 
following rates apply to Noncommercial Webcasters: \53\ (1) an annual 
per station or per channel rate of $500 for stations or channels will 
constitute full payment for digital audio transmissions totaling not 
more than 159,140 ATH per month and (2) if in any month a Noncommercial 
Webcaster makes digital audio transmissions in excess of 159,140 ATH 
per month, then the Noncommercial Webcaster will pay additional usage 
fees \54\ for digital audio transmissions of sound recordings in excess 
of the cap as follows: a per play rate of $.0008 for 2006, a per play 
rate of $.0011 for 2007, a per play rate of $.0014 for 2008, a per play 
rate of $.0018 for 2009 and a per play rate of $.0019 for 2010.\55\ As 
indicated supra at Section IV.C.d.1., we find no basis for making 
further adjustments to the usage rates to reflect inflation or 
bundling.
---------------------------------------------------------------------------

    \52\ In effect, payment of the $500 minimum administrative fee 
by Noncommercial Webcasters whose monthly ATH is below the cap will 
satisfy the full royalty obligations of such webcasters because it 
fully encompasses the per station usage fee. 37 CFR 380.3(b). 
Therefore, as a practical matter, recoupment does not come into play 
for such webcasters.
    \53\ Noncommercial Webcasters include such licensees who are 
eligible nonsubscription transmission services or new subscription 
services, irrespective of whether they transmit music in large part 
or in small part.
    \54\ Subject to the credit attributable to any unused balance of 
the annual minimum fee pursuant to 37 CFR 380.3(b).
    \55\ The Judges recognize that a smooth transition from the 
prior fee regime to the new fee structure adopted by the Judges 
hereinabove may be aided by permitting the limited use of an ATH 
calculation option. Such a transition option enhances the ability of 
some Services to effectuate speedy payments and, in so doing, 
improves the ability of copyright owners to more quickly obtain 
monies due. In short, such a transition measure is reasonably 
calculated to facilitate a smooth, speedy transition to the new fee 
structure adopted hereinabove by the Judges. Therefore, the usage 
fee structure established in this Final Determination will continue 
use of an ATH option for timely payment of fees due for the years 
2006 and 2007. Note: [See table near footnote 55 reference.]
    The following Aggregate Tuning Hours (ATH) usage rate 
calculation options will be available for the transition period of 
2006 and 2007: where ``Non-Music Programming'' is defined as 
Broadcaster programming reasonably classified as news, talk, sports 
or business programming; ``Broadcast Simulcast Programming'' is 
defined as Broadcaster simulcast programming not reasonably 
classified as news, talk, sports or business programming; and 
``Other Programming'' is defined as programming other than either 
Broadcaster simulcast programming or Broadcaster programming 
reasonably classified as news, talk, sports or business programming.

----------------------------------------------------------------------------------------------------------------
                                                          Broadcast simulcast
                                     Other programming        programming            Non-music  programming
----------------------------------------------------------------------------------------------------------------
Prior Fees.......................  $0.0117 per ATH.....  $0.0088 per ATH.....  $0.0008 per ATH.
2006.............................  $0.0123 per ATH.....  $0.0092 per ATH.....  $0.0011 per ATH.
2007.............................  $0.0169 per ATH.....  $0.0127 per ATH.....  $0.0014 per ATH.
----------------------------------------------------------------------------------------------------------------
Note: See footnote 55

D. The Section 112 Royalty Rates and Minimum Fees

1. Background
    Section 112(e) of the Copyright Act directs the Copyright Royalty 
Judges to establish rates and terms for the making of ephemeral copies 
of digital recordings to enable or facilitate the transmission of those 
recordings under the statutory license in section 114. As is the case 
with the section 114 license, we are tasked with setting rates and 
terms that ``most clearly represent the fees that would have been 
negotiated in the marketplace between a willing buyer and a willing 
seller,'' as well as establish ``a minimum fee for each type

[[Page 24101]]

of service offered by transmitting organizations.'' 17 U.S.C. 
112(e)(4). The types of ``economic, competitive, and programming 
information'' that we are to examine is the same for the section 112 
license as it is for the section 114 license. Id.
    Webcaster I set the royalty fee for the section 112 license at 8.8% 
of the total royalty fee by a Service under the section 114 license. 67 
FR 45240, 45262 (July 8, 2002). This fee, as a separate charge, was not 
part of the 2003 ``push forward'' of the Webcaster I rates negotiated 
by SoundExchange and the Services. Rather, the parties agreed to 
incorporate the fee for section 112 within the rates for section 114 
(which increased by a modest $0.000062 per performance over the 
Webcaster I rates), but the regulations adopting their agreement 
provided that of the total section 112/114 fee, 8.8% was ``deemed'' to 
comprise the charge for ephemeral recordings. 37 CFR 262.3(c).
2. Proposals of the Parties
    SoundExchange proposes to carry forward the combination of section 
112 and 114 rates from the prior license period, including the 
``deeming'' of 8.8% of the total fee owed by Services as constituting 
the section 112 charge. SoundExchange's Revised Rate Proposal (filed 
September 29, 2006) at 4. DiMA agrees with this proposal. DiMA RFF at ] 
115. Radio Broadcasters and the NRBMLC also believe that the fee for 
the section 112 license should be combined with that for section 114, 
but oppose the attribution of an 8.8% value for the section 112 
license. They argue that the effect is to hide an independent value for 
the section 112 license within the overall fee even though 
SoundExchange failed, in their view, to provide any evidence to justify 
the 8.8% value. Radio Broadcasters ``take no position as to the 
percentage of the overall royalty that is to be designated as the 
portion attributable to the making of ephemeral copies,'' but submit 
that ephemeral copies have no economic value separate from the value of 
the performances they effectuate. Radio Broadcasters PFF at ] 319. The 
NRBMLC also contends that ephemeral copies have no independent economic 
value, citing the Copyright Office's 2001 DMCA Section 104 Report in 
support. NRBMLC PFF at ]] 60, 62.
    None of the other parties offer specific proposals as to section 
112 rates. SBR Creative Media, Inc. combines section 112 with section 
114 in its request for a single fee, while CBI asserts that its 
stations have no need of the section 112 license. SBR PFF at ] 14; CBI 
PFF at ] 19.
3. The Record Evidence
    While the record in Webcaster I regarding the section 112 license 
was thin,\56\ it is slimmer still in this proceeding. SoundExchange 
proffers that because copyright owners and performers agreed to include 
the section 112 charge within the section 114 fee in the 2003 
negotiation provided that there was a recognition that section 112 
constituted 8.8% of the total value, this is ``strong evidence'' of 
what copyright owners and performers believe to be the value of the 
section 112 license. SoundExchange PFF at ] 1370. But see SoundExchange 
PFF at ] 1371 (conceding that ``[t]here has been little evidence 
adduced on the value of ephemeral copies * * *''). SoundExchange 
further contends that two marketplace agreements--the WMG-Next Radio 
agreement for a custom radio service and the SONY BMG-MusicMatch custom 
radio agreement--support its assertion that 8.8% is within the zone of 
reasonableness. Both of these agreements provide that 10% of the 
overall fees for streaming are attributable to the making of ephemeral 
copies. SoundExchange Ex. 002 DR; SoundExchange Ex. 004 DR.
---------------------------------------------------------------------------

    \56\ See Webcaster I CARP Report at 99-103 (speculating as to 
the reasons why the parties themselves seemed to attach little 
importance to the section 112 license).
---------------------------------------------------------------------------

    Radio Broadcasters and the NRBMLC counter that none of 
SoundExchange's witnesses discussed proposed rates or values for 
ephemeral recordings in written or oral testimony. Instead, they point 
to testimony of Adam Jaffe offered in Webcaster I that ephemeral copies 
have no independent economic value from the value of the public 
performances that they effectuate, Jaffe 2001 WDT at ] 82; Jaffe 2001 
WRT at 81; 2001 Tr. 6556:10-13 (Jaffe), and offer the Copyright 
Office's 2001 DMCA Section 104 Report in support of Dr. Jaffe's view.
4. Conclusion
    Of the thousands of pages of testimony and exhibits submitted by 
the parties in this proceeding, less than twenty of the pages are 
devoted to any discussion of the section 112 license and ephemeral 
copies. It is therefore evident that the parties consider the section 
112 license to be of little value at this point in time, which may 
explain why SoundExchange is content to roll whatever value the license 
may have into the rates for the section 114 license. Nevertheless, 
SoundExchange asks the Copyright Royalty Judges to bless its proposal 
that whatever the royalty fee for the section 114 may be, 8.8% of that 
fee constitutes the value of the section 112 license. We decline to 
accept SoundExchange's invitation for two reasons.
    First, the section 112 license requires us to determine the rate or 
rates that would have been negotiated between a willing buyer and a 
willing seller. SoundExchange's valuation of 8.8% is not a rate. 
Services will not be paying 8.8% more in total royalty fees because of 
this valuation, nor will they be subtracting 8.8% from their charge if 
they choose not to avail themselves of the section 112 license. Rather, 
the 8.8% valuation is nothing more than an effort to preserve a 
litigation position for future negotiations that the section 112 
license has some independent value, as it did in Webcaster I. It is 
understandable why DiMA would not find the 8.8% figure objectionable 
since it does not represent any additional charges to its members in 
this proceeding.
    Second, the paucity of the record prevents us from determining that 
8.8% of the section 114 royalties is either the value of or the rate 
for the section 112 license. SoundExchange's assertion that its 8.8% 
proposal is ``strong evidence'' of copyright owners' and performers' 
belief as to the appropriate rate applicable to section 112 is 
bootstrapping. SoundExchange did not present any persuasive testimony 
or evidence from copyright owners or performers on this point. We also 
do not find the WMG-Next Radio and the SONY BMG-MusicMatch agreements 
to be supportive of an 8.8% rate for ephemeral copies, which 
SoundExchange asserts are evidence of marketplace negotiations and 
establish a ``zone of reasonableness'' for section 112 rates in the 10% 
range. These agreements are for custom radio, which SoundExchange has 
long avowed is not DMCA compliant, and both have expired. SoundExchange 
Ex. 002 DR at 10 (WMG-Next Radio Solutions webcasting agreement); 
SoundExchange Ex. 004 DR at 14 (SONY BMG-MusicMatch Internet radio 
agreement). More importantly, the 10% figure in both is not a rate but 
is, like SoundExchange's proposal, a proclamation as to how much of the 
total fees paid by Next Radio and MusicMatch are attributable to the 
making of ephemeral copies. Since the 10% figure does not represent any 
actual monies to be paid by Next Radio or MusicMatch, it can hardly be 
argued that those agreements are marketplace evidence of negotiated 
royalty rates for the section 112 license.

[[Page 24102]]

    We are left with a record that demonstrates that, since the 
expiration of section 112 rates set in Webcaster I, copyright owners 
and performers are unable to secure separate fees for the section 112 
license. The license is merely an add-on to the securing of the 
performance right granted by the section 114 license. SoundExchange's 
proposal to include the section 112 license within the rates and 
minimum fees set for the section 114 license reflects this reality and 
we accept it. In so doing we decline, for the reasons stated above, to 
ascribe any particular percentage of the section 114 royalty as 
representative of the value of the section 112 license.\57\
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    \57\ We are mindful that section 112(e)(4) prescribes inclusion 
of a minimum fee for each type of service offered by transmitting 
organizations. Because we are determining that the section 112 fee 
is included within the section 114 license fee, we are, likewise, 
based upon the record evidence, doing the same for the section 112 
minimum fee.
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V. Terms for Royalty Payments Under the Section 112 and 114 Statutory 
Licenses

A. The Statutory Standard

    Sections 112(e)(3) and 114(f)(2)(A) of the Copyright Act, 17 
U.S.C., require the Copyright Royalty Judges to adopt royalty payment 
terms for the section 112 and 114 statutory licenses.\58\ It is 
established that the standard for setting terms of payment is what the 
record reflects would have been agreed to by willing buyers and willing 
sellers in the marketplace. Webcaster I, 67 FR 45240, 45266 (July 8, 
2002). It is not established, however, whether the terms adopted must, 
or should, be administratively feasible or efficient.
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    \58\ Consistent with Webcaster I, we are adopting terms for the 
collection, distribution and administration of royalty payments.
---------------------------------------------------------------------------

    In Webcaster I the parties agreed to a set of terms and, with the 
exception of a few disputed terms, presented them to the CARP for 
acceptance. In adopting the parties' proposed terms, the CARP declined 
to make a determination as to whether they were feasible or efficient 
and deferred to the judgment of the Librarian of Congress. Webcaster I 
CARP Report at 129. The Librarian declined to address the issue as well 
and evaluated the agreed-upon terms according to the ``arbitrary or 
contrary to law'' standard that the Librarian applied to the other 
aspects of the CARP's decision. The Librarian did, however, state that 
he was ``skeptical of the proposition that terms negotiated by parties 
in the context of a CARP proceeding are necessarily evidence of terms 
that a willing buyer and a willing seller would have negotiated in the 
marketplace,'' and noted that he would not have adopted all of the 
negotiated terms if his ``task were to determine the most reasonable 
terms governing payment of royalties.'' 67 FR 45266 (July 8, 2002). The 
question therefore remains as to whether the Judges should consider 
matters of feasability and administrative efficiency in adopting 
payment terms. We conclude the answer is yes, for two reasons.
    First, it is an axiom of the copyright laws that statutory licenses 
are designed to achieve efficiencies that the marketplace cannot. See, 
H.R. Rep. No. 94-1476, at 89 (1976). Typically, statutory licenses 
reduce transaction costs associated with licensing large volumes of 
copyrighted works from multiple rights holders. They guarantee access 
to the use of prescribed categories of works to those who satisfy the 
eligibility requirements of a license, while providing a return to the 
owners of the works subject to the license. Statutory licenses are 
about administrative efficiency. For example, they increase the speed 
and ease with which copyrighted works may be used. Adopting a set of 
terms whose operation is not practical, or creates additional 
unjustified costs and/or inefficiencies, is inconsistent with the 
precepts of statutory licensing, and we must avoid such circumstances.
    Second, we observe that rational willing buyers and sellers 
themselves will, in their agreements with one another, select terms 
that are practical, efficient, and avoid excessive costs. Consequently, 
we have considered the terms presented in agreements offered by the 
parties to this proceeding, assessed their applicability to the blanket 
license structure of the statutory licenses, and adopted those terms 
that will facilitate an efficient collection, distribution and 
administration of the statutory royalties.

B. Collection of Royalties

1. Background
    Unlike the statutory licenses set forth in sections 111, 119, and 
chapter 10 of the Copyright Act where royalty payments are submitted 
directly to a government collecting body (the Licensing Division of the 
Copyright Office), the section 112 and 114 licenses contain no such 
provision. Read literally, the licenses appear to require that 
licensees pay royalties directly to each copyright owner and performer. 
Recognizing the costs and inefficiencies of such an approach, the 
parties to the first section 112/114 proceeding negotiated a payment 
scheme whereby all services paid their royalties to a single 
``Receiving Agent'': SoundExchange, Inc. See 37 CFR 262.4. 
SoundExchange was, at that time, an unincorporated division of the 
Recording Industry Association of America.\59\ SoundExchange was then 
tasked with the responsibility of distributing royalties to those 
identified in the regulations as ``Designated Agents.'' By agreement of 
the parties, both SoundExchange and Royalty Logic, Inc. were identified 
as ``Designated Agents.'' The Librarian in Webcaster I reluctantly 
adopted this payment scheme. 67 FR 45267 n.45 (July 8, 2002).
---------------------------------------------------------------------------

    \59\ SoundExchange is now an independent entity. SoundExchange 
PFF at ] 72.
---------------------------------------------------------------------------

    The royalty collection and distribution scheme adopted in Webcaster 
I ended with the expiration of the 1998-2002 licensing period. In 
negotiations for rates and terms for the 2003-2004 licensing period, 
the parties retained the Receiving Agent/Designated Agent structure but 
did not recognize Royalty Logic as a Designated Agent.\60\ Royalty 
Logic objected to the parties' agreement and requested the Librarian to 
convene a CARP on the issue of royalty collection and payment. However, 
prior to the convening of the CARP, it withdrew from the proceeding. 
RLI PFF at ] 46. Royalty Logic now requests that the Copyright Royalty 
Judges recognize it in the regulations as both a Designated Agent and a 
Receiving Agent for the 2006-2010 license period.
---------------------------------------------------------------------------

    \60\ By the terms of the Copyright Royalty and Distribution 
Reform Act of 2004, the rates and terms adopted for the 2003-2004 
licensing period were extended through the end of 2005. See 
Copyright Royalty and Distribution Reform Act of 2004, Public Law 
108-419, section 6(b)(3) (transition provisions), 118 Stat. 2341, 
2370 (2004).
---------------------------------------------------------------------------

2. Royalty Logic
    Royalty Logic, acting as an authorized agent for certain copyright 
owners and performers,\61\ is a for-profit subsidiary of Music Reports, 
Inc. 6/14/06 Tr. 44:21-45:22, 50:20-51:1 (Gertz).\62\ Royalty Logic 
presented the direct testimony of Ronald Gertz, its founder, and the 
rebuttal testimony of Mr. Gertz and Peter Paterno, Esquire, who 
represents the recording artists Metallica and Dr. Dre. RLI PFF ] 
72.\63\
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    \61\ Despite an invitation from the Copyright Royalty Judges to 
do so, Royalty Logic was unable to identify all the copyright owners 
and performers constituting the ``RLI Affiliates.'' The list appears 
to include Lester Chambers, North Star Media, Sigala Records, ABKCO 
Music & Records, Inc., the Everest Record Group, Metallica and 
Peter, Paul and Mary.
    \62\ MRI is a for-profit company whose principal business is to 
assist broadcasters in the licensing of musical works used in their 
programming. 11/15/06 Tr. 103:7-20 (Gertz).
    \63\ Royalty Logic also presented written direct testimony of 
Lester Chambers, a recording artist. Mr. Chambers, however, did not 
appear at trial and his testimony therefore was not considered.

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[[Page 24103]]

    Royalty Logic contends that it is necessary for the Copyright 
Royalty Judges to formally recognize it as a ``Designated Agent''--
complete with direct accounting, reporting, payment and auditing rights 
vis-a-vis the Services--in the payment regulations to be adopted in 
this proceeding so that it may compete with SoundExchange as a royalty 
collection and distribution agent. The claimed need for competition is 
the central feature of Royalty Logic's presentation. According to 
Royalty Logic, Designated Agents can compete with one another on 
multiple levels, including: (1) The royalty rates to be charged; (2) 
interpretations of the statute; (3) distribution policies; and (4) 
costs. 6/14/06, Tr. 101:5-105:5; 124:14-127:20; 314:22-315:19 (Gertz). 
Royalty Logic advocates a payment scheme whereby a proportionate share 
of the royalties owed by each Service under the section 112 and 114 
licenses would be allocated to each Designated Agent; i.e., it and 
SoundExchange. Both Designated Agents would be entitled to direct 
receipt of statements of account, royalty fees and the reports of use 
of sound recordings required by 37 CFR part 370. For the initial 
payment period, Royalty Logic proposes that it receive five percent of 
each Service's royalties, which subsequently would be adjusted either 
upwards or downwards depending upon the number of performances 
belonging to Royalty Logic's affiliates that were made by the Service. 
The identity and ownership of performances (and ephemeral 
reproductions, if any) would be determined through examination of each 
Service's report of use of sound recordings. Thereafter, royalty 
payments to Royalty Logic and SoundExchange would be based solely upon 
performances of the works of each organization's members, as determined 
by the reports of use from the prior payment period. Any disputes 
between the Designated Agents concerning royalty allocations would be 
resolved by the Copyright Royalty Judges. RLI PFF at ] 117(g).
3. SoundExchange
    SoundExchange is a non-profit performing rights organization that 
represents thousands of record labels and artists who have specifically 
authorized SoundExchange to collect royalties on their behalf. Kessler 
WDT at 3. SoundExchange presented the direct testimony of John Simson, 
Barrie Kessler, Harold Ray Bradley, and Cathy Finks on the matter of 
royalty collection and distribution, as well as the rebuttal testimony 
of Thomas Lee.
    SoundExchange submits that it would be inefficient for the 
Copyright Royalty Judges to select more than one agent to receive and 
distribute royalties. SoundExchange PFF at ] 46. It argues that it 
should be the sole collection and distribution agent because it is 
proven and well-run and is the most qualified and dedicated to the 
interests of copyright owners and performers. SoundExchange PFF at ]] 
1558-67. It contends that Royalty Logic is unsuitable to serve as an 
agent because it is owned by Music Reports, Inc., a company that 
represents licensees of musical works, and such connection creates a 
conflict of interest. SoundExchange PFF at ]] 50, 51.
4. Receiving Agents and Designated Agents
    At the outset, the Copyright Royalty Judges must address a 
fundamental misperception of Royalty Logic, and to a somewhat lesser 
extent SoundExchange, regarding Receiving Agents and Designated Agents. 
As noted above, Receiving Agents and Designated Agents and the terms 
governing their operation were established by agreement by the parties 
in Webcaster I and were adopted, reluctantly, by the Librarian of 
Congress. 67 FR 45240, 45266 (July 8, 2002); See also, Determination of 
Reasonable Rates and Terms for the Digital Performance of Sound 
Recordings by Preexisting Subscription Services (Final rule), 68 FR 
39837, 39839 n.2 (July 3, 2003) (stating that in Webcaster I the 
Librarian ``expressed skepticism about the benefit of the two-tier 
structure involving a Receiving Agent and more than one Designated 
Agent, which adds expense and administrative burdens to a process the 
purpose of which is to make prompt, efficient, and fair payments of 
royalties to copyright owners and performers with a minimum of 
expense.'') The entire Receiving Agent/Designated Agent structure is a 
legal fiction with no basis or grounding in the statute,\64\ and we are 
under no obligation to preserve it, if we determine that there are 
sound reasons for adopting a different royalty collection and 
distribution system.
---------------------------------------------------------------------------

    \64\ Section 114(f)(5)(A) does reference the term ``receiving 
agent.'' However, that section of the law, which was created by the 
Small Webcaster Settlement Act of 2002, Public Law 107-321, 116 
Stat. 2780 (2002), is no longer in force. Furthermore, ``receiving 
agent'' was defined by reference to Sec.  261.2 of title 37 of the 
Code of Federal Regulations which are the very same rules adopted in 
Webcaster I.
---------------------------------------------------------------------------

    In evaluating the Receiving Agent/Designated Agent system, we share 
in the Librarian's skepticism that it is an effective and efficient 
means of collecting and distributing royalties. The system was pressed 
in negotiations by the Services in Webcaster I as a means of enabling 
Royalty Logic to enter the business of collecting and distributing 
section 112 and 114 royalties even though Royalty Logic did not 
represent at the time a single copyright owner or performer entitled to 
those royalties. 68 FR 39839 (July 3, 2003). While Royalty Logic's 
participation may have presented the Services with a potential future 
benefit, it is difficult to determine what, if any, benefit was derived 
by copyright owners and performers. Royalty Logic responds that the 
benefit to copyright owners and performers is the fruits of competition 
between it and SoundExchange, yet there is no evidence in the record 
that demonstrates that any copyright owners or performers sought or 
claimed such a supposed benefit. If anything, the record reflects that 
copyright owners and performers prefer SoundExchange as the sole 
collection and distribution entity. SoundExchange Ex. 239 RP, 240 RP; 
Lee WRT at 4; Bradley WRT at 20; Fink WDT at 14.
    We are also troubled by Royalty Logic's contention throughout this 
proceeding that an agent must be formally recognized by the Copyright 
Royalty Judges as a Designated Agent before it can have any involvement 
in the royalty distribution process. This position has no support in 
the statute. Sections 112(e) and 114(e) state that it is copyright 
owners and performers who may designate common agents for the receipt 
of royalties. As the Librarian observed in the 2003 section 112 and 114 
preexisting subscription service proceeding:

    In fact, it is not clear that RLI needs to participate in a CARP 
proceeding or be named in a negotiated settlement in order to act as 
a designated agent for purposes of collecting royalty fees on behalf 
of copyright owners and performers who are entitled to receive funds 
collected pursuant to the section 112 and section 114 licenses. 
Section 112(e)(2) and section 114(e) of the Copyright Act both 
expressly provide that a copyright owner of a sound recording may 
designate common agents to negotiate, agree to, pay, or receive 
royalty payments. Under these provisions, it is plausible that a 
copyright owner or performer could designate any agent of his or her 
choosing (including RLI)--whether or not that agent had been 
formally designated in the CARP proceeding--to receive royalties 
from the licensing of digital transmissions and, by doing so, limit 
the costs of such agents to those specified in section 114(g)(4), as 
amended by the Small Webcaster Settlement Act of 2002.

68 FR 39840 n.4 (July 3, 2003).
    Given our reservations about the Receiving Agent/Designated Agent

[[Page 24104]]

scheme, and the fact that none of the parties have presented any 
supporting evidence as to why it must or should continue, the Judges 
decline to adopt it in this proceeding. Rather, we are adopting a 
system that effectively and efficiently collects royalties from 
Services and distributes them to copyright owners, performers, and the 
agents that they may designate.
5. The Royalty Collective
a. The Need for a Single Collective \65\
---------------------------------------------------------------------------

    \65\ A ``Collective'' is defined in our rules as an organization 
that is designated by the Copyright Royalty Judges under section 114 
to both collect and distribute royalties. 37 CFR 370.5(b)(1).
---------------------------------------------------------------------------

    As noted above, a literal reading of the section 112 and 114 
licenses suggests that the Services pay directly each and every 
copyright owner and performer for the use of their respective works. No 
one in this proceeding, however, has suggested this arrangement, nor do 
any of the statutory licenses in the Copyright Act function in that 
fashion. Direct payments would add enormous transaction costs to the 
Services as they would be forced to locate and make arrangements with 
all copyright owners and performers for the thousands and thousands of 
sound recordings they perform, thereby eliminating much, if not all, of 
the efficiencies achieved by statutory licensing. Consequently, the 
royalty payment and collection system that we adopt must promote 
administrative efficiency and economy and reduce transaction costs 
wherever possible. This stated purpose is wholly consistent with the 
willing buyer/willing seller standard.
    In adopting an economically and administratively efficient royalty 
collection and distribution method, Royalty Logic proposes that we look 
to the marketplace for performance rights for musical works, which is 
dominated by three principal rights organizations: ASCAP, BMI and 
SESAC. These organizations operate on behalf of and are paid for by 
their members. Royalty Logic contends that competition among the 
performing rights organizations reduces the administration costs for 
collecting and distributing royalties in that market and is therefore 
more efficient than a single Collective such as SoundExchange. We 
reject application of the performing rights organization model to this 
proceeding for several reasons. First, the performing rights 
organizations do not operate exclusively within the confines of a 
statutory license. The majority of these organizations' activity is 
direct licensing with users of musical works.\66\ While Royalty Logic's 
argument that multiple Collectives promote competition on pricing may 
make some sense in the direct licensing context where rates and terms 
are set through private agreement, it does not make sense where the 
rates and terms are governed by statutory licenses.
---------------------------------------------------------------------------

    \66\ The performing rights organizations do collect royalties on 
behalf of their members for several of the statutory licenses in the 
Copyright Act. Participation in royalty collection and distribution 
under these licenses, however, was after they had established their 
direct licensing businesses.
---------------------------------------------------------------------------

    Second, performing rights organizations are member societies that 
license only the works of their members. The statutory licenses are 
blanket licenses that cover the works of all copyright owners and 
performers. Forcing owners and performers to choose membership in one 
or more Collectives when their works have already been licensed does 
not seem to serve a purpose and creates a significant practical 
difficulty in resolving how unaffiliated copyright owners and 
performers should receive their royalty distributions.
    Third, while Royalty Logic vehemently argues that competition 
between it and SoundExchange will reduce the overall administrative 
costs in the royalty collection and distribution process and therefore 
result in greater returns for copyright owners and performers, it never 
presented evidence demonstrating the likelihood of such an outcome.\67\ 
Further, Royalty Logic did not present any evidence showing that its 
administration costs on a per copyright owner or performer basis will 
be less than SoundExchange's, merely suggesting that they might be. 6/
14/06 Tr. 51:9-14 (Gertz); 11/15/06 Tr. 140:18-21 (Gertz).
---------------------------------------------------------------------------

    \67\ The small amount of testimony adduced on this point 
suggests that SoundExchange's administrative costs are lower than 
those of ASCAP and BMI. Kessler WDT at 16; 6/6/06 Tr. 190:1-4 
(Kessler).
---------------------------------------------------------------------------

    In sum, we find that selection of a single Collective represents 
the most economically and administratively efficient system for 
collecting royalties under the blanket license framework created by the 
statutory licenses. Transaction costs to the users of such a license 
are minimized when they can make payment to a single Collective, as 
opposed to allocating their payments among several. And there is no 
credible evidence that demonstrates copyright owners and performers 
suffer increased costs from a system with a single Collective. We now 
turn to the issue of which of the two parties in this proceeding, 
Royalty Logic or SoundExchange, will best fulfill the role of the 
Collective for section 112 and 114 royalties.
b. SoundExchange vs. Royalty Logic
    SoundExchange, a non-profit corporation under 26 U.S.C. 501(c)(6), 
has operated as the royalty collection and distribution entity since 
the beginning of the statutory licenses involved in this proceeding, 
and collects and distributes the royalties paid by preexisting 
subscription and satellite digital audio services under the statutory 
license created by the Digital Performance Right in Sound Recordings 
Act of 1995, Public Law 104-39, 109 Stat. 336 (1995). Kessler WDT at 2. 
SoundExchange is controlled by an 18-member Board of Directors 
comprised of equal numbers of representatives of copyright owners and 
performers. Copyright owners are represented by board members 
associated with the major record companies (five), independent labels 
(two), the Recording Industry Association of America (one), and the 
American Association of Independent Music (one). Performers are 
represented by one representative each from the American Federation of 
Television and Radio Artists; the American Federation of Musicians; and 
seven at-large artist seats. Simson WDT at 33. Though it is a non-
member organization, SoundExchange is authorized by over 12,000 
performers, 3,000 record labels and 800 record companies to collect 
royalties on their behalf. SoundExchange PFF at ] 75. SoundExchange 
distributes royalties to nearly 15,000 copyright owner and performer 
accounts and, as of September 20, 2005, has processed over 650 million 
sound recording performances. Kessler WDT at 12, 16. It is the only 
organization that directly receives reports of use from the Services 
under the licenses in this proceeding. 37 CFR 370.3(d)(4).
    SoundExchange presented Thomas Lee, President of the American 
Federation of Musicians, who testified that the structure of 
SoundExchange's Board provides the necessary checks and balances to 
ensure that performer interests are well represented. Lee WRT at 4-5. 
Several performer organizations--the American Federation of Television 
and Radio Artists, the Music Manager's Forum, and the Recording 
Artists' Coalition--wrote to Mr. Lee to express their preference and 
support for SoundExchange in these proceedings. SoundExchange Exs. 239 
RP, 240 RP, 241 RP; Lee WRT at 4. Recording artists Harold Ray Bradley 
and Cathy Fink testified as to their preference for SoundExchange as 
the sole collective for section 112 and 114

[[Page 24105]]

royalties. Bradley WRT at 20; Fink WDT at 14.
    Royalty Logic, a for-profit corporation, operated as a ``Designated 
Agent'' under the Webcaster I decision. Gertz WDT at 5-6; RLI PFF at ] 
36. Royalty Logic was created and is currently managed by the 
principals of Music Reports, Inc. Music Reports is in the business of 
allocating royalty payments from television stations to performing 
rights societies for musical works performed by those stations. Royalty 
Logic recently received a significant investment from Abry Partners and 
may be reorganizing as a result. 11/15/06 Tr. 130:16-131:5 (Gertz). As 
described in footnote 61, supra, the precise number and identity of 
copyright owners and performers currently represented by Royalty Logic 
is unclear. Royalty Logic did not present any copyright owner or 
performer witnesses \68\ in support of its request to be a royalty 
collection and distribution entity under the section 112 and 114 
licenses. It did, however, present the testimony of Peter Paterno, a 
lawyer representing clients in the music publishing and recording 
business. Mr. Paterno testified that one of his clients, the rock group 
Metallica, is affiliated with Royalty Logic and that he has proposed 
affiliation to three or four other clients. 11/15/06 Tr. 157:10-18; 
181:4-22 (Paterno). Royalty Logic also presented as an exhibit a 
royalty rate agreement between it and DiMA for performances under the 
statutory licenses, asserting that the agreement demonstrated at least 
one willing seller's preference for Royalty Logic. RLI PFF at ] 61.
---------------------------------------------------------------------------

    \68\ See, supra, n.63.
---------------------------------------------------------------------------

    After considering the presentations of both parties, the Copyright 
Royalty Judges conclude that SoundExchange is the superior organization 
to serve as the Collective for the 2006-2010 royalty period. 
SoundExchange has a proven track record in collecting and processing 
section 112 and 114 royalties, having done so since the inception of 
the statutory licenses. Its operational practices appear efficient and 
fair, and the Judges were not presented with credible evidence of 
significant failures or deficiencies.\69\ Moreover, we are persuaded 
that the structure and composition of SoundExchange's Board of 
Directors--with equal representation for copyright owners and 
performers--provides a greater balance of competing interests than that 
of Royalty Logic, which is controlled by one person, Mr. Gertz. This 
was confirmed by the weight of performer testimony on this point which 
demonstrated a decided preference for the services of SoundExchange 
over those of Royalty Logic. As the direct beneficiaries of the 
royalties collected under the statutory licenses, the copyright owner 
and performer testimony on this point is particularly persuasive.
---------------------------------------------------------------------------

    \69\ Mr. Gertz and Mr. Paterno did testify as to their awareness 
of some performers' dissatisfaction with SoundExchange--primarily 
due to its former ties to the Recording Industry Association of 
America, Inc.--but the statements were not corroborated by any 
copyright owner or performer testimony.
---------------------------------------------------------------------------

    This testimony is not outweighed by the Royalty Logic/DiMA royalty 
rate agreement offered by Royalty Logic as evidence of the Services' 
preference for Royalty Logic. It is difficult to envision any interest 
that the Services can have in the administration and distribution of 
royalties, which are the essential functions of the Collective. The 
Services' views on this subject are not reflected in the agreement. 
More importantly, the value of the agreement itself is illusory. Signed 
only by DiMA, a trade organization, it does not bind any Service to its 
terms; and, to date, no Services have signed on to the agreement. 11/
15/06 Tr. 108:7-15 (Gertz).
    The Copyright Royalty Judges also have serious reservations about 
the bona fides of Royalty Logic to act as the Collective under the 
statutory licenses. Royalty Logic ``is a for profit organization whose 
acknowledged goal is to make a profit,'' 67 FR 45267 (July 8, 2002), 
and Mr. Gertz candidly offered that his reasons for seeking entrance 
into the royalty collection and distribution business was ``to make 
money.'' 11/15/06 Tr. 89:7-10 (Gertz). In addition, Mr. Gertz stated 
that Royalty Logic may decide to pay some copyright owners and/or 
performers more than others. 11/15/06 Tr. 79:22-80:10 (Gertz). These 
statements raise a concern as to whether Royalty Logic will act in the 
best interest of all copyright owners and performers covered by the 
statutory licenses. The concern is elevated by the fact that Royalty 
Logic's participation in Webcaster I was championed by the Services and 
is favored more in this proceeding by the Services than by copyright 
owners and performers.\70\ As noted above, the Services should have 
little if any interest in the activities of the Collective to whom they 
pay their royalties (especially where they are relieved of the burden 
of paying more than one Collective) unless they have reason to believe 
that Royalty Logic may offer them reduced royalty fees in negotiations 
for future license periods. Mr. Gertz's business with MRI, which 
licenses the performance right for musical works on behalf of copyright 
users rather than owners and performers, suggests this outcome. \71\
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    \70\ The Copyright Royalty Judges find the testimony of Mr. 
Paterno an unpersuasive substitute for the views and preferences of 
copyright owners and performers. Only one of Mr. Paterno's clients, 
Metallica, has affiliated with Royalty Logic, and he admitted that 
he has not pressed his other clients to affiliate. 11/15/06 Tr. 
157:10-18 (Paterno). Rather, Mr. Paterno stated that he would 
advocate that clients affiliate with the collective that offered the 
most money, but he has seemingly made no inquiries on this matter, 
preferring instead to ``see how things play out.'' Id. at 157:22-
158:10.
    \71\ Our impression on this point is bolstered by the royalty 
agreement negotiated by Royalty Logic with DiMA, which adopts a rate 
(to be adjusted to our determination in this proceeding) far below 
any of the rates proposed by SoundExchange and is almost identical 
to the proposal of those commercial Services in this proceeding.
---------------------------------------------------------------------------

    Likewise, we have no basis in the record to expect that Royalty 
Logic will deduct lower administration fees, and therefore return 
greater royalties to copyright owners and performers, than 
SoundExchange. We were not presented with any comparison of Royalty 
Logic's and SoundExchange's administration fees, only an argument that 
competition between Collectives potentially could reduce the overall 
administration fees. Given that we are selecting only a single 
Collective, the potential effects of competition on administration fees 
to be charged to copyright owners and users is not relevant.
    In sum, the Copyright Royalty Judges determine that SoundExchange 
will best serve the interests of all copyright owners and performers 
whose works are subject to the statutory licenses and, therefore, shall 
be the Collective for the 2006-2010 royalty period.

C. Terms

    Having resolved the matter of who shall serve as the Collective for 
the 2006-2010 licensing period, the Copyright Royalty Judges now turn 
to other terms necessary to effectuate payment and distribution. Other 
than the few disputed terms, adoption of all the terms necessary for 
payment and distribution presents a decidedly unfortunate challenge, as 
is discussed below.
1. Webcaster I
    In Webcaster I, the parties to the proceeding presented the CARP 
with a comprehensive, negotiated settlement of nearly all the payment, 
administration and distribution terms for the section 112 and 114 
licenses. These terms included governing provisions for submission of 
payments and statements of account, confidentiality requirements, audit 
and verification of statements of account and royalty distributions, 
and unclaimed royalty

[[Page 24106]]

funds. The CARP was only called upon to resolve two relatively minor 
disputes regarding terms: whether to include four definitional 
provisions related to broadcast radio, and what to do with royalties 
for copyright owners who did not designate either SoundExchange or 
Royalty Logic to serve as their agent. Applying the willing buyer/
willing seller standard, the CARP adopted wholesale the negotiated 
terms as being the best evidence of marketplace negotiations, chose not 
to adopt the disputed definitional provisions, and determined that 
willing buyers and willing sellers would choose SoundExchange for 
copyright owners who failed to choose a Designated Agent. Webcaster I 
CARP Report at 128-134.
    The Librarian made significant alterations to the CARP's 
determination regarding terms. While he accepted the CARP's rejection 
of the broadcaster definitional terms and the determination that 
SoundExchange should serve as agent for unaffiliated copyright owners, 
he rejected a negotiated term limiting agents' liability for improper 
distributions and a negotiated term allowing agents to deduct 
litigation and licensing costs from collected royalty fees. 67 FR 
45268-9 (July 8, 2002). He also modified a negotiated definition of 
``gross proceeds'' and created two new definitional provisions: one for 
``Ephemeral Recordings'' and another for ``Listener.'' Further, he 
extended the right to select a Designated Agent to performers in 
addition to copyright owners, granted performers the right to audit 
their Designated Agent, and ``clarified'' the negotiated terms for 
allocating royalty payments among Designated Agents and for allocation 
of royalties among parties entitled to receive such royalties. 67 FR 
45270-1 (July 8, 2002).
2. Negotiated Terms
    As noted previously, there was no CARP proceeding for the 2003-2004 
licensing period. The parties settled their differences and offered the 
Librarian a negotiated agreement for rates and terms. The proposed 
agreement included the Webcaster I terms with some modifications. After 
offering the proposed agreement for public comment, the Librarian 
adopted it. See, Digital Performance Right in Sound Recordings and 
Ephemeral Recordings (Final rule), 69 FR 5693 (February 6, 2004). 
Codified in part 262 of the Copyright Office's regulations, the 
effective date of these rates and terms was extended by the Copyright 
Royalty and Distribution Reform Act of 2004 until December 31, 2005, 
the last day prior to the beginning of the rates and terms established 
by this proceeding. 37 CFR part 262; Copyright Royalty and Distribution 
Reform Act of 2004, Public Law 108-419, section 6(b)(3) (transition 
provisions), 118 Stat. 2341, 2370 (2004).
3. This Proceeding
    The parties' approach to rates and terms was decidedly different in 
this proceeding than in Webcaster I. Even though the Copyright Royalty 
and Distribution Reform Act of 2004 eliminated the CARP system and 
thereby removed the Librarian and the Copyright Office from further 
involvement in royalty adjustment proceedings, \72\ the parties 
apparently operated under the assumption that the terms contained in 
part 262 would remain in place for the 2006-2010 period plus the 
recommended amendments the Copyright Royalty Judges adopted. The 
existence of this assumption is confirmed in Part III of the written 
direct testimony of Barrie Kessler entitled ``Modifications Needed to 
License Terms,'' where Ms. Kessler only addresses those terms that she 
believed required amendment. The Services also refer to the regulations 
in part 262 as the ``current'' regulations. See, e.g. DiMA and Radio 
Broadcasters JPFF at ] 300.
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    \72\ The exception is the limited role of the Register of 
Copyrights on questions of law. See 17 U.S.C. 802(f)(1)(A)(ii), 
802(f)(2)(B)(i), and 802(f)(1)(D).
---------------------------------------------------------------------------

    In examining part 262, the Copyright Royalty Judges observe that 
these are the regulations of the ``Copyright Office, Library of 
Congress.'' The Copyright Royalty Judges do not have authority to 
amend, alter, or otherwise affect these regulations. There is no 
provision in the Copyright Royalty and Distribution Reform Act of 2004 
that carries forward the regulations contained in part 262 or makes 
them applicable to the Copyright Royalty Judges. \73\ Part 262 is 
therefore not a part of this proceeding.
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    \73\ In contrast, 17 U.S.C. 803(b)(6)(B) made the procedural 
rules of the CARP applicable to the Copyright Royalty Judges until 
120 days after appointment of the Copyright Royalty Judges or 
interim Copyright Royalty Judges who were required to adopt new 
regulations.
---------------------------------------------------------------------------

    Other than testimony and argument devoted to amendment of certain 
provisions contained in part 262, no other evidence was presented 
regarding terms for payment and distribution. The Copyright Royalty 
Judges anticipated that the parties would follow their approach from 
Webcaster I and present negotiated terms prior to the close of the 
record. When nothing was forthcoming, the Copyright Royalty Judges 
issued an order directing parties to file agreed-upon terms no later 
than the deadline for the submission of their reply findings of fact 
and conclusions of law. Amendment to Amended Trial Order, Docket No. 
2005-1 CRB DTRA (November 28, 2006). When nothing again was filed, the 
Copyright Royalty Judges questioned counsel at closing arguments who 
stated that because of the press of time in drafting and filing 
proposed findings and reply findings, they were unable to discuss or 
negotiate any terms. Still nothing has been filed.
    The failure to submit negotiated terms, coupled with the absence of 
further testimony, places the Copyright Royalty Judges in a difficult 
situation. While there is sufficient record testimony to resolve the 
disputed terms, see infra, the only evidence for the ``missing terms'' 
is the assumption of the parties that the provisions of part 262, plus 
our resolution of disputed terms, would constitute the terms for 
payment and distribution for the 2006-2010 statutory period. The 
parties' assumption is certainly thin evidence on which to proceed. 
Nevertheless, there are sufficient grounds to resolve the difficulty of 
the missing terms.
    First, we observe that in Webcaster I the Librarian made several 
wholesale changes to the parties' negotiated terms even though the 
parties did not propose such changes. The Librarian created definitions 
for ``Ephemeral Recordings'' and ``Listener'' because, in his view, 
their absence from the regulations would lead to confusion. 67 FR 
45269-70 (July 8, 2002). He extended the right of choosing a Designated 
Agent to performers as well as copyright owners and permitted them to 
audit Designated Agents because he could ``conceive of no reason why 
Performers should not be given the same choice'' as copyright owners. 
67 FR 45271 (July 8, 2002). It is clear that the Librarian took these 
actions so that the regulations governing terms would be clearer, more 
efficient and fairer to the parties affected. In other words, the 
Librarian endeavored to make the operation of the statutory licenses as 
smooth, efficient, and fair as possible. This approach was both 
necessary and proper and we adopt it here. It is wholly consistent with 
our conclusion, discussed in Section V.A., supra, that it is our 
obligation to adopt royalty payment and distribution terms that are 
practical and efficient. Failure to so act would produce statutory 
licenses that are operationally chaotic and otherwise unusable, thereby 
frustrating the Congressional intention underlying their establishment.
    Second, while an assumption that part 262 would apply to the new 
license period is not necessarily the best

[[Page 24107]]

evidence of the required terms, it nevertheless demonstrates the 
parties' intention to be bound by that provision (including, of course, 
their proposed changes). They certainly had ample opportunity to 
disavow this intention and did not do so. Rejection of the provisions 
contained in part 262 would, in addition to disrupting the operation of 
the statutory licenses, frustrate the demonstrated intention of the 
parties.
    Consequently, the Copyright Royalty Judges are adopting the 
undisputed provisions of part 262 as the baseline for terms for the 
2006-2010 licensing period, subject to the additions and changes 
adopted in this decision. Parties to future royalty rate proceedings 
are strongly urged to attach a greater importance to the adoption of 
terms and to create a more comprehensive and thorough record.
4. Disputed Terms
a. Late Payment Fees
    SoundExchange requests that the Copyright Royalty Judges establish 
a fee for late payments of statutory royalties equal to 2.5% of the 
total royalty owed by the Service for that period. The 2.5% late fee 
represents a substantial increase from the 0.75% late fee adopted in 
Webcaster I.
    SoundExchange argues that the increase is necessary. Barrie Kessler 
stated that many Services are late with their royalty payments and 
opined that a nominal late fee (0.75%) coupled with the high cost of 
bringing an infringement action for failure to pay royalties actually 
encourages late payments. Kessler WDT at 27-28; 6/8/06 Tr. 261:1-6 
(Kessler). Ms. Kessler also requested that the late fee be doubled 
every five days beginning 20 days after SoundExchange sends a Service 
notification of late payment. Kessler WDT at 28.
    In support of its request for the 2.5% late fee, SoundExchange 
offers several marketplace agreements between record companies and 
services containing, on average, a late payment fee of 1.5% per month, 
with a high of 2.0%. SoundExchange Ex. 012 DR (UMG-MusicNet 
subscription services agreement); SoundExchange Ex. 014 DR (UMG-Muze 
clip license agreement); SoundExchange Ex. 017 DR (UMG-Real Networks 
subscription agreement); SoundExchange Ex. 021 DR (SONY BMG-Muze clip 
license agreement); SoundExchange Ex. 002 DR (WMG-Next Radio Solutions 
webcasting agreement); SoundExchange Ex. 004 DR (SONY BMG-MusicMatch 
Internet radio agreement).
    Radio Broadcasters and DiMA counter that a 0.75% late fee (9% per 
annum) is generous and is greater than the current cost of borrowing. 
DiMA and Radio Broadcasters JPFF at ] 286. They cite the testimony of 
Eugene Levin of Entercom Broadcasting who, while conceding that 
Entercom has agreements with a number of suppliers (including ASCAP, 
BMI and SESAC) that provide for late fees ranging from 12% to 18% per 
year, testified that late fees are often waived so as to promote a 
positive business atmosphere and maintain good relations. Levin WRT at 
4-5; 11/14/06 Tr. 38:2-9, 41:5-12 (Levin). Radio Broadcasters cite 
Entercom's agreements with SESAC and Liquid Compass as evidence that 
late fees can be discretionary. Radio Broadcasters RFF at ]] 137-138.
    The Copyright Royalty Judges determine that the record evidence 
does not support continuation of a 0.75% per month late fee. Although 
Mr. Levin advocated that number, he did not provide a single agreement 
that his company had for music service that contained such a rate, nor 
did he state that he was aware of any agreements containing such a 
rate. To the contrary, Entercom's agreements with ASCAP, BMI and SESAC 
all provide for late fees ranging from 12% to 18% per annum. 11/14/06 
Tr. 38:2-9, 41:5-12 (Levin). The agreements cited by SoundExchange also 
fall within this range.
    We are not persuaded that contracting parties' ability to waive 
late fees requires rejection of a higher late fee. Contract provisions 
granting discretion to waive late fees were present in some of 
Entercom's agreements but were noticeably absent from the record 
company/music service agreements cited by SoundExchange. Mr. Levin was 
not aware of industry practices with respect to waiver. Moreover, his 
testimony that waiver promotes good business relationships with 
contractees is unavailing in the context of statutory licensing. While 
waiving a late fee can promote good feelings in a private agreement and 
thereby avoid termination of future goods and services by the offending 
party, it has no bearing for a statutory license where copyright owners 
and performers cannot, short of an infringement determination by a 
federal court, terminate access to their works under the license.
    After reviewing the record, the Copyright Royalty Judges find that 
the record company/music service agreements provided by SoundExchange 
are the best evidence as to the appropriate late fee. While these are 
not agreements for DMCA-compliant webcasting,\74\ there is no reason to 
believe that a term governing late payment, which is unrelated to the 
specific royalty rates of the agreements, would be any different in a 
DMCA-compliant agreement. The agreements establish a range of 1.5% to 
2%, with the majority of the agreements containing the 1.5% figure. We 
adopt the 1.5% figure.\75\ In doing so, we reject SoundExchange's 
request for a doubling of the late fee every five days when a royalty 
payment is later than 20 days because such a provision does not appear 
in any of the agreements, and SoundExchange has failed to demonstrate 
the need for such an extraordinary measure.
---------------------------------------------------------------------------

    \74\ We acknowledge that the status of whether ``custom radio'' 
services are DMCA-compliant remains unresolved, but resolution of 
this issue is not necessary to our determination.
    \75\ We note that Ms. Kessler testified that a 1.5% late fee, 
which is the late fee for the section 114 license applicable to 
preexisting subscription services, still does not discourage late 
payments. Ms. Kessler did not supply, other than her opinion, 
evidence to demonstrate that 2.5% is the magic number that will end, 
or virtually end, future late payments. Further, the Services 
demonstrated on cross-examination of Ms. Kessler that the frequency 
of late payments of the Services in this proceeding has not been so 
rampant as to warrant a much higher late fee. DiMA and Radio 
Broadcasters JPFF at ] 292.
---------------------------------------------------------------------------

b. Statements of Account
i. Late Fee for Statements of Account
    Webcaster I and part 262 of the Copyright Office's rules adopted a 
late fee for royalty payments but not for late statements of account. 
Ms. Kessler testified that it is not uncommon for SoundExchange to 
receive late and incomplete statements of account from Services. 6/6/06 
Tr. 137:12-138:20 (Kessler). She urged the Copyright Royalty Judges to 
adopt a penalty fee for late and/or incomplete statements calculated as 
if the Service had failed to pay royalties when required. Kessler WDT 
at 29-30. Mr. Levin testified that it was inappropriate to assess a 
late fee when a Service did not submit a timely statement of account 
and particularly unfair where the statement contained good faith errors 
or omissions. Levin WRT at ]] 16,19; 11/14/06, Tr. 44:18-45:11 (Levin).
    The Copyright Royalty Judges determine that timely submission of a 
statement of account is critical to the quick and efficient 
distribution of royalties. The statement of account identifies the time 
period to which the royalty payment applies, enables SoundExchange to 
determine what music service is being paid for and whether the filer 
has attributed the correct royalty fee to the service or services it is 
paying for. Although Mr.

[[Page 24108]]

Levin viewed the timely submission of statements of account as 
burdensome, we note that the regulations implementing the satellite, 
cable and digital audio recording devices or media (DART) statutory 
licenses require the simultaneous submission of royalty payments and 
statements of account. See 37 CFR 201.11 (satellite); 37 CFR 201.17 
(cable); 37 CFR 201.28 (DART). Failure to timely submit a statement of 
account with the royalty payment requires payment of a late fee under 
those licenses. We do not see any unique burdens or circumstances for 
Services operating under the section 112 and 114 licenses that require 
a different outcome. Consequently, we adopt the 1.5% per month late fee 
for statements of account.
    With respect to the completeness of the statement of account, the 
burden is upon the Service to provide as complete and error-free a 
statement as possible. All of the information needed to complete the 
statement--which is neither complex nor lengthy, see SoundExchange Ex. 
212 DP--is in the possession of the Service. Inconsequential good-faith 
omissions or errors should not warrant imposition of the late fee.
ii. Confidentiality
    There is considerable disagreement as to whether the information 
contained in statements of account is confidential and should be viewed 
by the Collective (SoundExchange) alone and not by copyright owners and 
performers. DiMA and Radio Broadcasters assert that a confidentiality 
requirement is necessary and is what willing buyers and sellers would 
agree to in a competitive market. DiMA and Radio Broadcasters JPFF at 
]] 297, 299. They cite to the confidentiality provisions of five 
agreements--SoundExchange Ex. 003 DR sec. 10(b) (WMG-MusicNet 
subscription services agreement); SoundExchange Ex. 004 DR sec. 10.01 
(SONY BMG-MusicMatch Internet radio agreement); SoundExchange Ex. 006 
DR sec. 8.1 (EMI standard wholesale agreement for streaming/conditional 
download licenses); SoundExchange Ex. 017 DR sec. 5(b) (UMG-Real 
Networks subscription agreement); SoundExchange Ex. 014 DR sec. 6 (WMG-
Muze clip license agreement)--in support of this assertion. Further, 
Mr. Levin testified that the information concerning a Service's total 
royalty payments, listening minutes and aggregate tuning hours is not 
the kind of information that Services share with their competitors. 11/
14/06 Tr. 47:14-48:7 (Levin).
    SoundExchange counters that precluding copyright owners and 
performers from access to the information contained in the statements 
of account not only impedes the operation of its Board of Directors 
(which is comprised of owners and performers) but is a denial of the 
fundamental information necessary for enforcement of the statutory 
licenses. Kessler WDT at 33. Copyright owners and performers only see 
statement of account information from prior statutory license periods 
in the aggregate \76\ and cannot make informed decisions to identify 
and act against Services that, in their view, are not satisfying their 
statutory requirements. Id. at 31. SoundExchange also views the 
evidence of marketplace activity differently from DiMA and Radio 
Broadcasters, citing two marketplace agreements between record 
companies and digital music services that require the reporting of 
revenues and number of performances so that the copyright owners can 
verify the calculation of the royalty fee owed under the agreement. 
SoundExchange Ex. 002 DR (WMG-Next Radio Solutions webcasting license 
agreement); SoundExchange Ex. 018 DR (UMG-Music Video Net video 
agreement). Radio Broadcasters counter that even these two agreements 
have a general confidentiality provision that prevents disclosure to 
the public of confidential business information. Radio Broadcasters RFF 
at ] 127.
---------------------------------------------------------------------------

    \76\ See 37 CFR 262.5(c).
---------------------------------------------------------------------------

    The Copyright Royalty Judges are troubled by continuing the 
confidentiality restrictions adopted in Webcaster I and part 262 of the 
Copyright Office's regulations. Because they were the product of 
negotiations, there was no finding that the types of information 
contained in the statements of account were indeed ``confidential''; 
i.e., that their disclosure would harm the business interests of the 
reporting Services. Mr. Levin, the only witness offered by the Services 
on this point, did not articulate how the information contained in the 
statements can or could injure the competitiveness of a Service, or 
otherwise negatively affect its operation. 11/14/06 Tr. 96:11-104:11 
(Levin). Further, he conceded that a competitor's subscription to 
Arbitron, a broadcasting rating and information service, would provide 
much of the same information contained in the statements. 11/14/06 Tr. 
85:20-87:13, 97:13-99:14 (Levin). The Copyright Royalty Judges come to 
the conclusion that while Services may want the information contained 
in statements of account to remain confidential, they have not 
demonstrated how disclosure of that information is, or is likely to be, 
harmful.
    Even more troubling is how the denial of information to copyright 
owners and performers impacts their substantive rights under the 
section 112 and 114 licenses. Without the information contained in a 
statement of account, a copyright owner and/or performer cannot begin 
to make an informed judgment as to whether a Service is complying with 
its statutory obligations and making the correct payments. Permitting 
the disclosure of the information contained in statements of account 
only to the Collective does not alter this concern and grants the 
Collective an inordinate amount of control as the only party 
knowledgeable of the compliance of each of the Services. No support can 
be found in the statute for an arrangement that effectively imbues only 
the Collective, or any other agent, with the information necessary to 
pursue an infringement action. In sum, copyright owners and performers 
should not be excluded from obtaining the information contained in a 
statement of account of a Service that performed his or her work.\77\
---------------------------------------------------------------------------

    \77\ This conclusion again is supported by the satellite, cable 
and DART licenses which permit copyright owners full and complete 
access to the statements of account of the users of those licenses.
---------------------------------------------------------------------------

    Review of the licensing agreements cited by Radio Broadcasters does 
not counsel a different result. The confidentiality provisions in these 
agreements generally prohibit disclosure of ``business'' information to 
those not party to the agreement, i.e., the public at-large. They do 
not deny the licensor--the copyright owner--access to this information. 
And several of the cited agreements permit the licensor to share 
obtained business information with others, including advisors, 
financial officers, bankers, and contractors with a need to know. 
SoundExchange Ex. 004 DR sec. 10.01(a) (SONY BMG-MusicMatch Internet 
radio agreement); SoundExchange Ex. 002 DR sec. 9.01(a) (WMG-NextRadio 
Solutions webcasting license agreement). In the statutory licensing 
setting, copyright owners and performers are the licensors of their 
works to the Services and certainly need to know the information 
concerning the Services' payments. Providing the information only to 
SoundExchange, as the Services request, is not consistent with these 
agreements.
    What is consistent with these agreements, however, is a prohibition 
of disclosure of statement of account information to the general 
public, and we are adopting that restriction.

[[Page 24109]]

Therefore, access to statements of account is limited to copyright 
owners and performers, and their agents and representatives identified 
in the regulations, whose works were used by a Service under the 
section 112 and 114 licenses. Copyright owners, performers, and the 
Collective are directed in the regulations to implement the necessary 
procedures to guard against access to and dissemination of statement of 
account information to unauthorized parties.
c. Audit and Verification of Payments
    SoundExchange requests four ``clarifications'' to the part 262 
regulations regarding verification of royalty payments made by the 
Services: (1) That the Services should be required to maintain their 
books and records for the three prior calendar years (January to 
December) and the entirety of those three years may be audited; (2) 
persons other than Certified Public Accountants (``CPAs'') should be 
allowed to serve as auditors and need only be independent from the 
Service they are auditing; (3) individual copyright owners and 
performers, in addition to the Collective, should be permitted to audit 
Services; and (4) the threshold for allocating the costs of an audit 
should be reduced from a 10% underpayment to a 5% underpayment, or if 
the Service underpays by $5,000 or more. SoundExchange PFF ]] at 1314, 
1342. With the exception of the first request, the Copyright Royalty 
Judges decline to accept SoundExchange's proposals.
    By eliminating the requirements that an auditor be a CPA and 
independent from SoundExchange, SoundExchange is seeking to transform 
the prior verification process into what it calls ``technical audits.'' 
SoundExchange PFF at ]] 1327, 1328. Technical audits would, in 
SoundExchange's view, reduce its costs by allowing in-house technical 
experts to conduct the audits rather than outside CPAs, who might lack 
the technical capability for the data processing and analysis and may 
be more expensive than in-house personnel. 6/6/06 Tr. 269:16-273:4 
(Kessler). The Copyright Royalty Judges have reviewed the record 
company/music service agreements submitted by the parties and note that 
some agreements permit technical audits. SoundExchange Ex. 002 DR sec. 
5.02 (WMG-NextRadio Solutions webcasting license agreement); 
SoundExchange Ex. 003 DR sec. 4(b) (WMG-MusicNet subscription services 
agreement). Others, however, require the auditors to be CPAs, 
(SoundExchange Ex. 001 DR sec. 4.01 (WMG-All Media Guide clip license 
agreement), SoundExchange Ex. 014 DR sec. 3.7 (WMG-Muze clip license 
agreement)), and that the auditor be independent of both the licensor 
and licensee. SoundExchange Ex. 001 DR sec. 4.01 (WMG-All Media Guide 
clip license agreement); SoundExchange Ex. 004 DR sec. 6.05 (SONY BMG-
MusicMatch Internet radio agreement); SoundExchange Ex. 007 DR sec. 
8(b) (EMI--MusicNet nonportable subscription services agreement). While 
technical audits by in-house personnel might be cheaper for the 
Collective, we conclude that it is more important, in the interest of 
establishing a high level of credibility in the results of the audit, 
that the auditor be independent of both parties. 11/14/06 Tr. 9:8-11:11 
(Levin). Likewise, we find that requiring the auditor to be certified 
further raises confidence levels in the audit. CPAs have experience in 
the field of accounting, are familiar with the accepted standards and 
practices for auditing, and are governed by standards of conduct. If 
technical skills are required to process the data of a Service, the 
auditor can request assistance. In sum, the Copyright Royalty Judges 
are requiring that the auditor be certified and independent of both 
SoundExchange and the Service being audited.
    The Copyright Royalty Judges are not persuaded that all copyright 
owners and performers should have the right to audit a Service. It is 
one thing for a Service that enters into a private agreement with a 
copyright owner to allow the owner to conduct an audit. Kenswil WDT at 
10-11; Eisenberg WDT at 13. It is an altogether different matter to 
grant the right of audit to copyright owners and performers under a 
statutory licensing scheme where there is no privity of contract and 
the potential for a significant magnitude of audits. We agree with the 
Services that subjecting them to that kind of extensive auditing 
process could seriously impair their business operations. Levin WRT at 
] 30.
    Likewise, we are not persuaded that the underpayment threshold for 
shifting the cost of an audit should be reduced from an underpayment of 
10% to one of 5% of the royalty fee due, or $5,000, whichever is less. 
Ms. Kessler stated that the 10% figure was too high and encourages the 
Services to deliberately underpay their royalties up to 9%, but she did 
not offer any direct evidence of this occurring. Furthermore, the 10% 
figure is consistent with several of the record company/music service 
agreements. SoundExchange Ex. 003 DR sec. 6(f) (WMG-MusicNet 
subscription services agreement); SoundExchange Ex. 004 DR sec. 6.06 
(SONY BMG-MusicMatch Internet radio agreement); SoundExchange 010 DR 
sec. 5(c) (EMI-Muze clip license agreement).
    Finally, the Copyright Royalty Judges agree with SoundExchange that 
the Services should retain their books and records for the three 
calendar years prior to the current year. Services need to know with 
precision how long they must retain their books and records as well as 
the time period that is potentially subject to an audit.
d. Other Matters
i. Recordkeeping
    Subsequent to the conclusion of the hearings on the direct 
statements, the Copyright Royalty Judges issued an Interim Final Rule 
in Docket No. RM 2005-2, the docket establishing notice and 
recordkeeping requirements for certain digital audio services using the 
section 112 and 114 licenses. Notice and Recordkeeping for Use of Sound 
Recordings Under Statutory License (Interim final rule), 71 FR 59010 
(October 6, 2006). The Interim Final Rule prescribed the format and 
delivery requirements for reports of use of sound recordings, thereby 
completing the interim recordkeeping rulemaking process begun several 
years ago by the Copyright Office. Several of the parties in this 
proceeding, uncertain as to whether such recordkeeping issues would be 
addressed in this docket and noting the statutory language that permits 
the Copyright Royalty Judges to modify their existing recordkeeping 
rules, 17 U.S.C. 803(c)(3), submitted testimony on the matter. Although 
we ruled that recordkeeping matters would be addressed through notice 
and comment rulemaking and not in this proceeding, we did not strike 
the testimony. Instead, such testimony was allowed to remain in the 
record as evidence, if any, of the relative costs to the Services and 
the Collective associated with recordkeeping. Order Denying Radio 
Broadcasters' Motion for Clarification, Motion to Strike SoundExchange 
Exhibits 414-418 DP and Motion to Set Expedited Briefing Schedule, 
Docket No. 2005-1 CRB DTRA (September 8, 2006).
    The costs of recordkeeping to both sides did not influence our 
determination of royalty rates in this proceeding, nor are we choosing 
to amend our existing recordkeeping regulations. See 37 CFR part 370. 
The testimony presented by the Services as to the costs associated with 
recordkeeping was vague and unsubstantiated and went little beyond the 
assertion that there are some costs associated with recordkeeping. 
Clearly,

[[Page 24110]]

any recordkeeping, no matter how modest, involves some costs. 
Nevertheless, the statute does require reporting. 17 U.S.C. 112(e)(4), 
114(f)(4)(A). And despite the fact that most of the requirements for 
creating a report of use have been public since 2002, see Notice and 
Recordkeeping for Use of Sound Recordings Under Statutory Licenses 
(Notice requesting written proposals and announcement of status 
conference), 67 FR 59573 (September 23, 2002), the Services failed to 
quantify either the magnitude of the actual overall costs or the 
average costs to individual Services. In any event, because our 
recordkeeping regulations are interim and not final, there is ample 
opportunity to again address the Services' costs in a future 
rulemaking. The ability to influence and adjust the costs of 
recordkeeping is far more direct in that context than this rate 
determination proceeding and is more properly handled there.
    Likewise, there was no persuasive testimony compelling an 
adjustment of the current recordkeeping regulations. SoundExchange 
presses for census reporting, but the record is incomplete as to 
effectiveness of the current periodic reporting requirement. Once 
again, the Copyright Royalty Judges conclude that this matter is more 
appropriate for a future recordkeeping rulemaking.
ii. Royalty Distribution
    Having eschewed the Receiving Agent/Designated Agent model of the 
prior regulations in favor of a single Collective, we are adopting 
streamlined royalty distribution procedures. SoundExchange has the 
responsibility of collecting the royalties from the Services and 
distributing them to all eligible copyright owners and performers, 
including any agents designated by copyright owners and/or performers 
for their receipt. Deduction of costs by SoundExchange is governed by 
the statute, 17 U.S.C. 114(g)(3), and therefore we have no authority to 
address any resulting inequalities.
    With respect to the distribution methodology, the Copyright Royalty 
Judges are retaining the requirement that all performances be valued 
equally by the Collective. SoundExchange is already familiar with and 
applies this requirement. 6/6/06 Tr. 171:2-172:10 (Kessler). Copyright 
owners and/or performers are certainly free to agree to subsequent 
distribution methodologies once they have received their distribution 
from the Collective.

VI. Determination and Order

    Having fully considered the record, the Copyright Royalty Judges 
make the above Findings of Fact based on the record. Relying upon these 
Findings of Fact, the Copyright Royalty Judges unanimously adopt every 
portion of this Final Determination of the Rates and Terms of the 
Statutory Licenses for the digital audio transmission of sound 
recordings, pursuant to 17 U.S.C. 114, and for the making of ephemeral 
phonorecords, pursuant to 17 U.S.C. 112(e). The Copyright Royalty 
Judges exercise their authority under 17 U.S.C. 803(c), and transmit 
this Final Determination to the Librarian of Congress for publication 
in the Federal Register, pursuant to 17 U.S.C. 803(c)(6).

So Ordered.

James Scott Sledge,

Chief Copyright Royalty Judge.

William J. Roberts,

Copyright Royalty Judge.

Stanley C. Wisniewski,

Copyright Royalty Judge.

Dated: April 23, 2007.

List of Subjects in 37 CFR Part 380

    Copyright, Sound recordings.

Final Regulation

0
For the reasons set forth in the preamble, Chapter III of Title 37 of 
the Code of Federal Regulations is amended by adding new Subchapter E 
to read as follows:

Subchapter E--Rates and Terms for Statutory Licenses

PART 380--RATES AND TERMS FOR CERTAIN ELIGIBLE NONSUBSCRIPTION 
TRANSMISSIONS, NEW SUBSCRIPTION SERVICES AND THE MAKING OF 
EPHEMERAL REPRODUCTIONS

Sec.
380.1 General.
380.2 Definitions.
380.3 Royalty fees for the public performance of sound recordings 
and for ephemeral recordings.
380.4 Terms for making payment of royalty fees and statements of 
account.
380.5 Confidential information.
380.6 Verification of royalty payments.
380.7 Verification of royalty distributions.
380.8 Unclaimed funds.

    Authority: 17 U.S.C. 112(e), 114(f), 804(b)(3).


Sec.  380.1  General.

    (a) Scope. This part 380 establishes rates and terms of royalty 
payments for the public performance of sound recordings in certain 
digital transmissions by Licensees in accordance with the provisions of 
17 U.S.C. 114, and the making of Ephemeral Recordings by Licensees in 
accordance with the provisions of 17 U.S.C. 112(e), during the period 
January 1, 2006, through December 31, 2010.
    (b) Legal compliance. Licensees relying upon the statutory licenses 
set forth in 17 U.S.C. 112 and 114 shall comply with the requirements 
of those sections, the rates and terms of this part, and any other 
applicable regulations.
    (c) Relationship to voluntary agreements. Notwithstanding the 
royalty rates and terms established in this part, the rates and terms 
of any license agreements entered into by Copyright Owners and digital 
audio services shall apply in lieu of the rates and terms of this part 
to transmission within the scope of such agreements.


Sec.  380.2  Definitions.

    For purposes of this part, the following definitions shall apply:
    (a) Aggregate Tuning Hours (ATH) means the total hours of 
programming that the Licensee has transmitted during the relevant 
period to all Listeners within the United States from all channels and 
stations that provide audio programming consisting, in whole or in 
part, of eligible nonsubscription transmissions or noninteractive 
digital audio transmissions as part of a new subscription service, less 
the actual running time of any sound recordings for which the Licensee 
has obtained direct licenses apart from 17 U.S.C. 114(d)(2) or which do 
not require a license under United States copyright law. By way of 
example, if a service transmitted one hour of programming to 10 
simultaneous Listeners, the service's Aggregate Tuning Hours would 
equal 10. If 3 minutes of that hour consisted of transmission of a 
directly licensed recording, the service's Aggregate Tuning Hours would 
equal 9 hours and 30 minutes. As an additional example, if one Listener 
listened to a service for 10 hours (and none of the recordings 
transmitted during that time was directly licensed), the service's 
Aggregate Tuning Hours would equal 10.
    (b) Broadcaster is a type of Commercial Webcaster or Noncommercial 
Webcaster that owns and operates a terrestial AM or FM radio station 
that is licensed by the Federal Communications Commission.
    (c) Collective is the collection and distribution organization that 
is designated by the Copyright Royalty Judges. For the 2006-2010 
license period, the Collective is SoundExchange, Inc.

[[Page 24111]]

    (d) Commercial Webcaster is a Licensee, other than a Noncommercial 
Webcaster, that makes eligible digital audio transmissions.
    (e) Copyright Owners are sound recording copyright owners who are 
entitled to royalty payments made under this part pursuant to the 
statutory licenses under 17 U.S.C. 112(e) and 114(f).
    (f) Ephemeral Recording is a phonorecord created for the purpose of 
facilitating a transmission of a public performance of a sound 
recording under a statutory license in accordance with 17 U.S.C. 
114(f), and subject to the limitations specified in 17 U.S.C.112(e).
    (g) Licensee is a person that has obtained a statutory license 
under 17 U.S.C. 114, and the implementing regulations, to make eligible 
nonsubscription transmissions, or noninteractive digital audio 
transmissions as part of a new subscription service (as defined in 17 
U.S.C. 114(j)(8)), or that has obtained a statutory license under 17 
U.S.C. 112(e), and the implementing regulations, to make Ephemeral 
Recordings for use in facilitating such transmissions.
    (h) Noncommercial Webcaster is a Licensee that makes eligible 
digital audio transmissions and:
    (1) Is exempt from taxation under section 501 of the Internal 
Revenue Code of 1986 (26 U.S.C. 501),
    (2) Has applied in good faith to the Internal Revenue Service for 
exemption from taxation under section 501 of the Internal Revenue Code 
and has a commercially reasonable expectation that such exemption shall 
be granted, or
    (3) Is operated by a State or possession or any governmental entity 
or subordinate thereof, or by the United States or District of 
Columbia, for exclusively public purposes.
    (i) Performance is each instance in which any portion of a sound 
recording is publicly performed to a Listener by means of a digital 
audio transmission (e.g., the delivery of any portion of a single track 
from a compact disc to one Listener) but excluding the following:
    (1) A performance of a sound recording that does not require a 
license (e.g., a sound recording that is not copyrighted);
    (2) A performance of a sound recording for which the service has 
previously obtained a license from the Copyright Owner of such sound 
recording; and
    (3) An incidental performance that both:
    (i) Makes no more than incidental use of sound recordings 
including, but not limited to, brief musical transitions in and out of 
commercials or program segments, brief performances during news, talk 
and sports programming, brief background performances during disk 
jockey announcements, brief performances during commercials of sixty 
seconds or less in duration, or brief performances during sporting or 
other public events and
    (ii) Other than ambient music that is background at a public event, 
does not contain an entire sound recording and does not feature a 
particular sound recording of more than thirty seconds (as in the case 
of a sound recording used as a theme song).
    (j) Performers means the independent administrators identified in 
17 U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C. 
114(g)(2)(D).
    (k) Qualified Auditor is a Certified Public Accountant.
    (l) Side Channel is a channel on the website of a broadcaster which 
channel transmits eligible transmissions that are not simultaneously 
transmitted over the air by the broadcaster.


Sec.  380.3  Royalty fees for the public performance of sound 
recordings and for ephemeral recordings.

    (a) Royalty rates and fees for eligible digital transmissions of 
sound recordings made pursuant to 17 U.S.C. 114, and the making of 
ephemeral recordings pursuant to 17 U.S.C. 112 are as follows:
    (1) Commercial Webcasters: (i) The per-performance fee for 2006-
2010: For all digital audio transmissions, including simultaneous 
digital audio retransmissions of over-the-air AM or FM radio 
broadcasts, a Commercial Webcaster will pay a performance royalty of: 
$.0008 per performance for 2006, $.0011 per performance for 2007, 
$.0014 per performance for 2008, $.0018 per performance for 2009, and 
$.0019 per performance for 2010. The royalty payable under 17 U.S.C. 
112 for any reproduction of a phonorecord made by a Commercial 
Webcaster during this license period and used solely by the Commercial 
Webcaster to facilitate transmissions for which it pays royalties as 
and when provided in this section is deemed to be included within such 
royalty payments.
    (ii) Optional transitional Aggregate Tuning Hour fee for 2006-2007: 
The following Aggregate Tuning Hours (ATH) usage rate calculation 
options, in lieu of the per-performance fee, are available for the 
transition period of 2006 and 2007:

----------------------------------------------------------------------------------------------------------------
                                                          Broadcast simulcast
                                     Other programming        programming            Non-music  programming
----------------------------------------------------------------------------------------------------------------
Prior Fees.......................  $0.0117 per ATH.....  $0.0088 per ATH.....  $0.0008 per ATH.
2006.............................  $0.0123 per ATH.....  $0.0092 per ATH.....  $0.0011 per ATH.
2007.............................  $0.0169 per ATH.....  $0.0127 per ATH.....  $0.0014 per ATH.
----------------------------------------------------------------------------------------------------------------

    (iii) ``Non-Music Programming'' is defined as Broadcaster 
programming reasonably classified as news, talk, sports or business 
programming; ``Broadcast Simulcast Programming'' is defined as 
Broadcaster simulcast programming not reasonably classified as news, 
talk, sports or business programming; and ``Other Programming'' is 
defined as programming other than either Broadcaster simulcast 
programming or Broadcaster programming reasonably classified as news, 
talk, sports or business programming.
    (2) Noncommercial Webcasters: (i) For all digital audio 
transmissions totaling not more than 159,140 Aggregate Tuning Hours 
(ATH) in a month, including simultaneous digital audio retransmissions 
of over-the-air AM or FM radio broadcasts, a Noncommercial Webcaster 
will pay an annual per channel or per station performance royalty of 
$500 in 2006, 2007, 2008, 2009 and 2010.
    (ii) For all digital audio transmissions totaling in excess of 
159,140 Aggregate Tuning Hours (ATH) in a month, including simultaneous 
digital audio retransmissions of over-the-air AM or FM radio 
broadcasts, a Noncommercial Webcaster will pay a performance royalty 
of: $.0008 per performance for 2006, $.0011 per performance for 2007, 
$.0014 per performance for 2008, $.0018 per performance for 2009, and 
$.0019 per performance for 2010.
    (iii) The following Aggregate Tuning Hours (ATH) usage rate 
calculation options, in lieu of the per-performance fee, are available 
for the transition period of 2006 and 2007:

[[Page 24112]]



----------------------------------------------------------------------------------------------------------------
                                                          Broadcast simulcast
                                     Other programming        programming            Non-music  programming
----------------------------------------------------------------------------------------------------------------
Prior Fees.......................  $0.0117 per ATH.....  $0.0088 per ATH.....  $0.0008 per ATH.
2006.............................  $0.0123 per ATH.....  $0.0092 per ATH.....  $0.0011 per ATH.
2007.............................  $0.0169 per ATH.....  $0.0127 per ATH.....  $0.0014 per ATH.
----------------------------------------------------------------------------------------------------------------

    (iv) ``Non-Music Programming'' is defined as Broadcaster 
programming reasonably classified as news, talk, sports or business 
programming; ``Broadcast Simulcast Programming'' is defined as 
Broadcaster simulcast programming not reasonably classified as news, 
talk, sports or business programming; and ``Other Programming'' is 
defined as programming other than either Broadcaster simulcast 
programming or Broadcaster programming reasonably classified as news, 
talk, sports or business programming.
    (v) The royalty payable under 17 U.S.C. 112 for any reproduction of 
a phonorecord made by a Noncommercial Webcaster during this license 
period and used solely by the Noncommercial Webcaster to facilitate 
transmissions for which it pays royalties as and when provided in this 
section is deemed to be included within such royalty payments.
    (b) Minimum fee. Each Commercial Webcaster and Noncommercial 
Webcaster will pay an annual, nonrefundable minimum fee of $500 for 
each calendar year or part of a calendar year of the license period 
during which they are Licensees pursuant to licenses under 17 U.S.C. 
114. This annual minimum fee is payable for each individual channel and 
each individual station maintained by Commercial Webcasters and 
Noncommercial Webcasters and is also payable for each individual Side 
Channel maintained by Broadcasters who are Licensees. The minimum fee 
payable under 17 U.S.C. 112 is deemed to be included within the minimum 
fee payable under 17 U.S.C. 114. Upon payment of the minimum fee, the 
Licensee will receive a credit in the amount of the minimum fee against 
any additional royalty fees payable in the same calendar year.


Sec.  380.4  Terms for making payment of royalty fees and statements of 
account.

    (a) Payment to the Collective. A Licensee shall make the royalty 
payments due under Sec.  380.3 to the Collective.
    (b) Designation of the Collective. (1) Until such time as a new 
designation is made, SoundExchange, Inc., is designated as the 
Collective to receive statements of account and royalty payments from 
Licensees due under Sec.  380.3 and to distribute such royalty payments 
to each Copyright Owner and Performer, or their designated agents, 
entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).
    (2) If SoundExchange, Inc. should dissolve or cease to be governed 
by a board consisting of equal numbers of representatives of Copyright 
Owners and Performers, then it shall be replaced by a successor 
Collective upon the fulfillment of the requirements set forth in 
paragraph (b)(2)(i) of this section.
    (i) By a majority vote of the nine Copyright Owner representatives 
and the nine Performer representatives on the SoundExchange board as of 
the last day preceding the condition precedent in paragraph (b)(2) of 
this section, such representatives shall file a petition with the 
Copyright Royalty Board designating a successor to collect and 
distribute royalty payments to Copyright Owners and Performers entitled 
to receive royalties under 17 U.S.C. 112(e) or 114(g) that have 
themselves authorized such Collective.
    (ii) The Copyright Royalty Judges shall publish in the Federal 
Register within 30 days of receipt of a petition filed under paragraph 
(b)(2)(i) of this section an order designating the Collective named in 
such petition.
    (c) Monthly payments. A Licensee shall make any payments due under 
Sec.  380.3 by the 45th day after the end of each month for that month, 
except that payments due under Sec.  380.3 for the period beginning 
January 1, 2006, through the last day of the month in which the 
Copyright Royalty Judges issue their final determination adopting these 
rates and terms shall be due 45 days after the end of such period. All 
monthly payments shall be rounded to the nearest cent.
    (d) Minimum payments. A Licensee shall make any minimum payment due 
under Sec.  380.3(b) by January 31 of the applicable calendar year, 
except that:
    (1) Payment due under Sec.  380.3(b) for 2006 and 2007 shall be due 
45 days after the last day of the month in which the Copyright Royalty 
Judges issue their final determination adopting these rates and terms.
    (2) Payment for a Licensee that has not previously made eligible 
nonsubscription transmissions, noninteractive digital audio 
transmissions as part of a new subscription service or Ephemeral 
Recordings pursuant to the licenses in 17 U.S.C. 114 and/or 17 U.S.C. 
112(e) shall be due by the 45th day after the end of the month in which 
the Licensee commences to do so.
    (e) Late payments and statements of account. A Licensee shall pay a 
late fee of 1.5% per month, or the highest lawful rate, whichever is 
lower, for any payment and/or statement of account received by the 
Collective after the due date. Late fees shall accrue from the due date 
until payment is received by the Collective.
    (f) Statements of account. Any payment due under Sec.  380.3 shall 
be accompanied by a corresponding statement of account. A statement of 
account shall contain the following information:
    (1) Such information as is necessary to calculate the accompanying 
royalty payment;
    (2) The name, address, business title, telephone number, facsimile 
number (if any), electronic mail address and other contact information 
of the person to be contacted for information or questions concerning 
the content of the statement of account;
    (3) The handwritten signature of:
    (i) The owner of the Licensee or a duly authorized agent of the 
owner, if the Licensee is not a partnership or corporation;
    (ii) A partner or delegee, if the Licensee is a partnership; or
    (iii) An officer of the corporation, if the Licensee is a 
corporation.
    (4) The printed or typewritten name of the person signing the 
statement of account;
    (5) The date of signature;
    (6) If the Licensee is a partnership or corporation, the title or 
official position held in the partnership or corporation by the person 
signing the statement of account;
    (7) A certification of the capacity of the person signing; and
    (8) A statement to the following effect:

    I, the undersigned owner or agent of the Licensee, or officer or 
partner, have examined this statement of account and hereby state 
that it is true, accurate, and complete to my knowledge after 
reasonable due diligence.

    (g) Distribution of royalties. (1) The Collective shall promptly 
distribute royalties received from Licensees to Copyright Owners and 
Performers, or

[[Page 24113]]

their designated agents, that are entitled to such royalties. The 
Collective shall only be responsible for making distributions to those 
Copyright Owners, Performers, or their designated agents who provide 
the Collective with such information as is necessary to identify the 
correct recipient. The Collective shall distribute royalties on a basis 
that values all performances by a Licensee equally based upon the 
information provided under the reports of use requirements for 
Licensees contained in Sec.  370.3 of this chapter.
    (2) If the Collective is unable to locate a Copyright Owner or 
Performer entitled to a distribution of royalties under paragraph 
(g)(1) of this section within 3 years from the date of payment by a 
Licensee, such distribution may first be applied to the costs directly 
attributable to the administration of that distribution. The foregoing 
shall apply notwithstanding the common law or statutes of any State.
    (h) Retention of records. Books and records of a Licensee and of 
the Collective relating to payments of and distributions of royalties 
shall be kept for a period of not less than the prior 3 calendar years.


Sec.  380.5  Confidential information.

    (a) Definition. For purposes of this part, ``Confidential 
Information'' shall include the statements of account and any 
information contained therein, including the amount of royalty 
payments, and any information pertaining to the statements of account 
reasonably designated as confidential by the Licensee submitting the 
statement.
    (b) Exclusion. Confidential Information shall not include documents 
or information that at the time of delivery to the Collective are 
public knowledge. The party claiming the benefit of this provision 
shall have the burden of proving that the disclosed information was 
public knowledge.
    (c) Use of Confidential Information. In no event shall the 
Collective use any Confidential Information for any purpose other than 
royalty collection and distribution and activities related directly 
thereto.
    (d) Disclosure of Confidential Information. Access to Confidential 
Information shall be limited to:
    (1) Those employees, agents, attorneys, consultants and independent 
contractors of the Collective, subject to an appropriate 
confidentiality agreement, who are engaged in the collection and 
distribution of royalty payments hereunder and activities related 
thereto, for the purpose of performing such duties during the ordinary 
course of their work and who require access to the Confidential 
Information;
    (2) An independent and Qualified Auditor, subject to an appropriate 
confidentiality agreement, who is authorized to act on behalf of the 
Collective with respect to verification of a Licensee's statement of 
account pursuant to Sec.  380.6 or on behalf of a Copyright Owner or 
Performer with respect to the verification of royalty distributions 
pursuant to Sec.  380.7;
    (3) Copyright Owners and Performers, including their designated 
agents, whose works have been used under the statutory licenses set 
forth in 17 U.S.C. 112(e) and 114(f) by the Licensee whose Confidential 
Information is being supplied, subject to an appropriate 
confidentiality agreement, and including those employees, agents, 
attorneys, consultants and independent contractors of such Copyright 
Owners and Performers and their designated agents, subject to an 
appropriate confidentiality agreement, for the purpose of performing 
their duties during the ordinary course of their work and who require 
access to the Confidential Information; and
    (4) In connection with future proceedings under 17 U.S.C. 112(e) 
and 114(f) before the Copyright Royalty Judges, and under an 
appropriate protective order, attorneys, consultants and other 
authorized agents of the parties to the proceedings or the courts.
    (e) Safeguarding of Confidential Information. The Collective and 
any person identified in paragraph (d) of this section shall implement 
procedures to safeguard against unauthorized access to or dissemination 
of any Confidential Information using a reasonable standard of care, 
but no less than the same degree of security used to protect 
Confidential Information or similarly sensitive information belonging 
to the Collective or person.


Sec.  380.6  Verification of royalty payments.

    (a) General. This section prescribes procedures by which the 
Collective may verify the royalty payments made by a Licensee.
    (b) Frequency of verification. The Collective may conduct a single 
audit of a Licensee, upon reasonable notice and during reasonable 
business hours, during any given calendar year, for any or all of the 
prior 3 calendar years, but no calendar year shall be subject to audit 
more than once.
    (c) Notice of intent to audit. The Collective must file with the 
Copyright Royalty Board a notice of intent to audit a particular 
Licensee, which shall, within 30 days of the filing of the notice, 
publish in the Federal Register a notice announcing such filing. The 
notification of intent to audit shall be served at the same time on the 
Licensee to be audited. Any such audit shall be conducted by an 
independent and Qualified Auditor identified in the notice, and shall 
be binding on all parties.
    (d) Acquisition and retention of report. The Licensee shall use 
commercially reasonable efforts to obtain or to provide access to any 
relevant books and records maintained by third parties for the purpose 
of the audit. The Collective shall retain the report of the 
verification for a period of not less than 3 years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent and Qualified Auditor, shall serve as an acceptable 
verification procedure for all parties with respect to the information 
that is within the scope of the audit.
    (f) Consultation. Before rendering a written report to the 
Collective, except where the auditor has a reasonable basis to suspect 
fraud and disclosure would, in the reasonable opinion of the auditor, 
prejudice the investigation of such suspected fraud, the auditor shall 
review the tentative written findings of the audit with the appropriate 
agent or employee of the Licensee being audited in order to remedy any 
factual errors and clarify any issues relating to the audit; Provided 
that an appropriate agent or employee of the Licensee reasonably 
cooperates with the auditor to remedy promptly any factual errors or 
clarify any issues raised by the audit.
    (g) Costs of the verification procedure. The Collective shall pay 
the cost of the verification procedure, unless it is finally determined 
that there was an underpayment of 10% or more, in which case the 
Licensee shall, in addition to paying the amount of any underpayment, 
bear the reasonable costs of the verification procedure.


Sec.  380.7  Verification of royalty distributions.

    (a) General. This section prescribes procedures by which any 
Copyright Owner or Performer may verify the royalty distributions made 
by the Collective; Provided, however, that nothing contained in this 
section shall apply to situations where a Copyright Owner or Performer 
and the Collective have agreed as to proper verification methods.
    (b) Frequency of verification. A Copyright Owner or Performer may 
conduct a single audit of the Collective

[[Page 24114]]

upon reasonable notice and during reasonable business hours, during any 
given calendar year, for any or all of the prior 3 calendar years, but 
no calendar year shall be subject to audit more than once.
    (c) Notice of intent to audit. A Copyright Owner or Performer must 
file with the Copyright Royalty Board a notice of intent to audit the 
Collective, which shall, within 30 days of the filing of the notice, 
publish in the Federal Register a notice announcing such filing. The 
notification of intent to audit shall be served at the same time on the 
Collective. Any audit shall be conducted by an independent and 
Qualified Auditor identified in the notice, and shall be binding on all 
Copyright Owners and Performers.
    (d) Acquisition and retention of report. The Collective shall use 
commercially reasonable efforts to obtain or to provide access to any 
relevant books and records maintained by third parties for the purpose 
of the audit. The Copyright Owner or Performer requesting the 
verification procedure shall retain the report of the verification for 
a period of not less than 3 years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent and Qualified Auditor, shall serve as an acceptable 
verification procedure for all parties with respect to the information 
that is within the scope of the audit.
    (f) Consultation. Before rendering a written report to a Copyright 
Owner or Performer, except where the auditor has a reasonable basis to 
suspect fraud and disclosure would, in the reasonable opinion of the 
auditor, prejudice the investigation of such suspected fraud, the 
auditor shall review the tentative written findings of the audit with 
the appropriate agent or employee of the Collective in order to remedy 
any factual errors and clarify any issues relating to the audit; 
Provided that the appropriate agent or employee of the Collective 
reasonably cooperates with the auditor to remedy promptly any factual 
errors or clarify any issues raised by the audit.
    (g) Costs of the verification procedure. The Copyright Owner or 
Performer requesting the verification procedure shall pay the cost of 
the procedure, unless it is finally determined that there was an 
underpayment of 10% or more, in which case the Collective shall, in 
addition to paying the amount of any underpayment, bear the reasonable 
costs of the verification procedure.


Sec.  380.8  Unclaimed funds.

    If the Collective is unable to identify or locate a Copyright Owner 
or Performer who is entitled to receive a royalty distribution under 
this part, the Collective shall retain the required payment in a 
segregated trust account for a period of 3 years from the date of 
distribution. No claim to such distribution shall be valid after the 
expiration of the 3-year period. After expiration of this period, the 
Collective may apply the unclaimed funds to offset any costs deductible 
under 17 U.S.C. 114(g)(3). The foregoing shall apply notwithstanding 
the common law or statutes of any State.

    Dated: April 23, 2007.
James Scott Sledge,
Chief Copyright Royalty Judge.
[FR Doc. E7-8128 Filed 4-30-07; 8:45 am]
BILLING CODE 1410-10-P