4510 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

1Section 115 divides the responsibility of setting 

terms governing royalty payments between the 

Copyright Royalty Judges and the Register of 

Copyrights. See 17 U.S.C. 115(c)(3)(C) & (D) (setting 

forth Judges’ authority) and (b)(1) & (c)(4)–(5) 

(setting forth Register’s authority); see also, Final 

Order, Division of Authority Between the Copyright 

Royalty Judges and the Register of Copyrights Under 

the Section 115 Statutory License, Docket No. RF 

2008–1, 73 FR 48396 (August 19, 2008); see also 

infra at Section V. 

2 Yahoo! Inc. and Napster LLC each subsequently 

withdrew from the proceeding. See Yahoo! Inc. 

Notice of Withdrawal of Petition to Participate 

(filed August 24, 2007) and Napster, LLC Notice of 

Withdrawal (filed October 19, 2007). 

3The Judges never officially accepted RLI’s 

written direct statement. That aside, RLI’s direct 

statement made clear that its participation was 

solely ‘‘on the issue of competition among agents 

for the licensing of musical works and/or the 

collection and distribution of royalties, on behalf of 

copyright owners and/or their agents.’’ RLI Written 

Direct Statement at 1. Subsequently, RLI and the 

Copyright Owners stipulated that RLI would not 

participate in the direct or rebuttal phases of the 

proceeding or the closing arguments unless the 

issue identified in RLI’s direct statement was raised 

at any point in the proceeding. See Joint Stipulation 

Regarding Participation by Royalty Logic, Inc. in the 

Above-Captioned Proceeding (filed February 1, 

2008). The issue was not raised. 

LIBRARY OF CONGRESS 

Copyright Royalty Board 

37 CFR Part 385 

[Docket No. 2006–3 CRB DPRA] 

Mechanical and Digital Phonorecord 

Delivery Rate Determination 

Proceeding 

AGENCY: Copyright Royalty Board, 

Library of Congress. 

ACTION: Final rule. 

SUMMARY: The Copyright Royalty Judges 

are announcing their final 

determination of the rates and terms for 

the use of musical works in physical 

phonorecords, permanent downloads, 

and ringtones and are adopting as final 

regulations the rates and terms for the 

use of musical works in limited 

downloads, interactive streaming, and 

incidental digital phonorecord 

deliveries. 

DATES: Effective Date: March 1, 2009. 

ADDRESSES: The final determination also 

is posted on the Copyright Royalty 

Board Web site at http://www.loc.gov/ 

crb/proceedings/2006–3/dpra-publicfinal-rates-terms.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 

This is a rate determination 

proceeding convened under 17 U.S.C. 

803(b) and 37 CFR 351. A Notice 

announcing commencement of the 

proceeding with a request for Petitions 

to Participate to determine the rates and 

terms of royalty payments 1 for the 

making and distribution of 

phonorecords, including digital 

phonorecord deliveries (‘‘DPDs’’), under 

the statutory license set forth in Section 

115 of the Copyright Act was published 

in the Federal Register on January 9, 

2006. 71 FR 1454. The rate to be paid 

to songwriters and music publishers for 

the reproduction and distribution of 

their musical works in physical 

phonorecords and permanent digital 

downloads is the larger of 9.1¢ or 1.75¢ 

per minute of playing time (or fraction 

thereof) for the entire license period; the 

rate to be paid under section 115 for 

ringtones is 24¢. Consistent with our 

adoption of the same term for late 

payments in the Webcaster II and 

SDARS determinations, 72 FR 24084, 

24107 (May 1, 2007) (Webcaster II), 73 

FR 4080, 4099 (January 24, 2008) 

(SDARS), we are establishing a late 

payment fee of 1.5% per month 

measured from the date the payment 

was due as provided in the regulations 

of the Register. See 37 CFR 

201.19(e)(7)(i). Section 803(d)(2)(B) of 

the Copyright Act governs the effective 

date of the rates and terms established 

in this proceeding. 17 U.S.C. 

803(d)(2)(B). The parties submitted a 

settlement regarding the rates to be paid 

to songwriters and music publishers for 

the reproduction of their musical works 

in limited downloads, interactive 

streaming and incidental DPDs and that 

settlement was published for comment 

pursuant to 17 U.S.C. 801(b)(7)(A)(i). 

Having received no objection to the 

settlement from any participant, we are 

adopting the settled rates and terms as 

final regulations. The effective date of 

these rates and terms also is governed 

by 17 U.S.C. 803(d)(2)(B). 

II. This Proceeding 

A. Procedural History 

The following entities filed Petitions 

to Participate in response to the January 

9, 2006, request: Royalty Logic, Inc. 

(‘‘RLI’’); the Songwriters Guild of 

America (‘‘SGA’’); the National Music 

Publishers’ Association, Inc. (‘‘NMPA’’), 

the Songwriters Guild of America, and 

the Nashville Songwriters Association 

International, jointly (collectively, 

‘‘Copyright Owners’’); Apple Computer, 

Inc.; America Online, Inc.; 

RealNetworks, Inc.; Napster, LLC; Sony 

Connect, Inc.; Digital Media Association 

(‘‘DiMA’’); Yahoo! Inc.; MusicNet, Inc.; 

MTV Networks, Inc.; and Recording 

Industry Association of America 

(‘‘RIAA’’). 

Following an unsuccessful 

negotiation period, the following parties 

filed written direct statements by the 

November 30, 2006 deadline: RIAA; 

Copyright Owners; and DiMA, joined by 

its member companies America Online, 

Inc., Apple Computer, Inc., MusicNet, 

Inc., Napster, LLC, RealNetworks, Inc. 

and Yahoo! Inc.2 RLI filed its written 

direct statement on March 2, 2007.3

Discovery was followed by live 

testimony. Testimony in the direct 

phase was taken from January 28, 2008, 

to February 26, 2008. Copyright Owners 

presented the testimony of the following 

witnesses: Mr. Rick Carnes, songwriter, 

and President, Songwriters Guild of 

America; Mr. Steve Bogard, professional 

songwriter and President, Nashville 

Songwriters Association International; 

Mr. Roger Faxon, Chairman and Chief 

Executive Officer (‘‘CEO’’), EMI Music 

Publishing; Mr. Philip Galston, 

songwriter, music publisher and record 

producer; Ms. Victoria Shaw, 

songwriter; Ms. Maia Sharp, singer, 

songwriter and musician; Mr. Steven 

Paulus, composer; Mr. Irwin Z. 

Robinson, Chairman, Paramount 

Arabella Music; Ms. Claire Enders, CEO, 

Enders Analysis; Mr. David Israelite, 

President and CEO, NMPA; Mr. Ralph 

Peer, Chairman and CEO, Peermusic, 

Inc.; Ms. Helen Murphy, President, 

International Media Services, Inc.; Dr. 

William Landes, Clifton R. Musser 

Professor of Law and Economics, 

University of Chicago Law School; and 

Mr. Nicholas Firth, former Chairman 

and CEO, BMG Music Publishing 

Worldwide. 

RIAA presented testimony from the 

following witnesses: Mr. Geoffrey 

Taylor, CEO, British Phonographic 

Industry; Mr. Richard Boulton, Global 

Managing Director, Finance and 

Accounting Services; Ms. Linda 

McLaughlin, Senior Vice President, 

National Economic Research Associates; 

Mr. Colin Finkelstein, Chief Financial 

Officer, EMI Music North America; Ms. 

Andrea Finkelstein, Senior Vice 

President of Business Affairs Operations 

and Administration, SONY BMG Music 

Entertainment; Mr. Michael Kushner, 

Senior Vice President, Business and 

Legal Affairs, Atlantic Music Group; Mr. 

Jerold Rosen, Executive Vice President 

of the Commercial Music Group, SONY 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4511 

4 In the motion, the parties requested that the 

Judges permit the parties to submit the settlement 

on September 15, 2008, or a later date set by the 

Judges, and relieve the parties of their obligation to 

file proposed findings of fact and conclusions of 

law on the settled issues. See Joint Motion to Adopt 

Procedures for Submission of Partial Settlement at 

2–3 (filed May 15, 2008). On May 27, 2008, the 

Judges denied the parties’ request to set a deadline 

for submission of the partial settlement and granted 

their request regarding their obligation to address 

the settled issues in their proposed findings of fact 

and conclusions of law. See Order Re Joint Motion 

to Adopt Procedures for Submission of Partial 

Settlement, Docket No. 2006–3 CRB DPRA (May 27, 

2008). Subsequently, the Judges amended their 

order to provide for a September 22, 2008 deadline 

for the parties to submit their settlement. See Order 

Setting Deadline to File Settlement, Docket No. 

2006–3 CRB DPRA (September 17, 2008). 

BMG Music Entertainment; Dr. David J. 

Teece, the Thomas Tusher Chair, Haas 

School of Business, and Director, 

Institute of Management, Innovation 

and Organization, University of 

California at Berkeley; Ms. Victoria 

Bassetti, Senior Vice President of 

Industry and Government Affairs 

Worldwide and Vice President, AntiPiracy, North America, for EMI Music; 

Mr. Ronald Wilcox, former Executive 

Vice President and Chief Business and 

Legal Affairs Officer, SONY BMG Music 

Entertainment; Mr. David Hughes, 

Senior Vice President of Technology, 

RIAA; Mr. Glen Barros, President and 

CEO, Concord Music Group; and Mr. 

David Munns, independent music 

consultant in the United Kingdom, 

former Vice Chairman of EMI Music and 

CEO of EMI Music North America. 

DiMA presented testimony from the 

following witnesses: Mr. Eduardo 

(‘‘Eddy’’) Cue, Vice President, iTunes; 

Mr. Alan McGlade, President and CEO, 

MediaNet Digital; Ms. Margaret GuerinCalvert, Vice Chairman, Compass 

Lexecon and Senior Managing Director, 

FTI; and Mr. Timothy Quirk, Vice 

President of Music Programming, 

Rhapsody America. 

The parties’ filed written rebuttal 

statements on April 10, 2008. Rebuttal 

testimony was taken from May 6, 2008, 

through May 21, 2008. On May 15, 

2008, the parties informed the Copyright 

Royalty Judges (‘‘Judges’’) that they had 

reached a settlement regarding the rates 

and terms for ‘‘limited downloads and 

interactive streaming, including all 

known incidental digital phonorecord 

deliveries.’’ See Joint Motion to Adopt 

Procedures for Submission of Partial 

Settlement at 1 (filed May 15, 2008).4

The parties filed the partial settlement 

on September 22, 2008, and it was 

published in the Federal Register on 

October 1, 2008, 73 FR 57033. Public 

comments were due on October 31, 

2008. A single comment, filed jointly by 

CTIA–The Wireless Association and the 

National Association of Broadcasters, 

was received. See infra at Section III.C. 

DiMA presented the rebuttal 

testimony of: Ms. Guerin-Calvert; Mr. 

Dan Sheeran, Senior Vice President of 

Business Development, RealNetworks; 

and Mr. Alexander Kirk, General 

Manager of Product Management, 

Rhapsody America, LLC. 

RIAA presented the rebuttal 

testimony of: Mr. David Alfaro, 

Managing Director, FTI Technology 

Practice; Ms. Terri Santisi, President, T. 

Media Services, International; Mr. Scott 

Pascucci, President, Rhino 

Entertainment Company, an affiliate of 

Warner Music Group; Dr. Daniel Slottje, 

Professor of Economics, Southern 

Methodist University and Senior 

Managing Director, FTI Consulting, Inc.; 

Mr. Bruce Benson, Senior Managing 

Director, FTI Consulting, Inc.; Ms. 

Finkelstein; Dr. Steven Wildman, James 

H. Quello Professor of 

Telecommunication Studies and CoDirector of the Quello Center for 

Telecommunications Management and 

Law, Michigan State University; Mr. 

Mark Eisenberg, Executive Vice 

President, Business and Legal Affairs, in 

the Global Digital Business Group, 

SONY BMG Music Entertainment; and 

Mr. Robert Emmer, Chief Operating 

Officer and co-founder, Shout! Factory. 

Copyright Owners presented the 

rebuttal testimony of: Mr. Faxon; Mr. 

Jeremy Fabinyi, Managing Director of 

Mechanicals, MCPS–PRS Alliance; Dr. 

Kevin Murphy, George J. Stigler 

Distinguished Service Professor of 

Economics in the Graduate School of 

Business and the Department of 

Economics, University of Chicago; Mr. 

Alfred Pedecine, Senior Vice President 

and Chief Financial Officer, The Harry 

Fox Agency; Dr. Landes; Dr. Ketan 

Mayer-Patel, Associate Professor, 

Department of Computer Science, 

University of North Carolina at Chapel 

Hill; and Ms. Judith Finell, President, 

Judith Finell MusicServices, Inc. 

In addition to the written direct 

statements and written rebuttal 

statements, the Judges heard 28 days of 

testimony, which filled over 8,000 pages 

of transcript. Over 140 exhibits were 

admitted. The docket contains over 340 

pleadings, motions and orders. 

On July 2, 2008, after the evidentiary 

phase of the proceeding, the 

Participants filed their respective 

Proposed Findings of Fact and 

Conclusions of Law. The Participants 

filed replies on July 18, 2008. Closing 

arguments occurred on July 24, 2008, 

after which time the record was closed. 

On October 2, 2008, the Judges issued 

the Initial Determination of Rates and 

Terms. Pursuant to 17 U.S.C. 803(c)(2) 

and 37 CFR Part 353, RIAA filed a 

motion on October 17, 2008, for 

rehearing to reconsider the timing of the 

late payment fee of 1.5% per month. At 

the same time, all the parties jointly 

requested that the Judges ‘‘hold this 

motion for 20 days to allow negotiation 

by the parties’’ because they were of the 

view that they ‘‘may be able to resolve 

the issues related to the timing of the 

late fee through negotiation, which may 

obviate this motion.’’ As part of the joint 

request, Copyright Owners indicated 

they opposed the rehearing, while 

DiMA took no position on rehearing. 

The parties’ negotiations failed to 

resolve the issues related to the timing 

of the late fee within the requested 20 

days, and nothing further was filed on 

the motion. Having reviewed the 

motion, the Judges denied the motion 

for rehearing, by Order dated 

November 12, 2008. As reviewed in said 

Order, none of the grounds in the 

motion presented the type of 

exceptional case where the Initial 

Determination is not supported by the 

evidence. 17 U.S.C. 803(c)(2)(A); 37 CFR 

353.1 and 353.2. The motion did not 

meet the required standards set by 

statute, by regulation and by case law. 

The motion amounted to no more than 

a rehash of the same arguments the 

Judges considered and rejected in the 

Initial Determination. 

B. Referrals to the Register 

During the course of the proceeding, 

RIAA and DiMA each sought from the 

Judges referral of a novel question of 

law to the Register of Copyrights 

(‘‘Register’’). RIAA filed its motion prior 

to the filing of written direct statements; 

DiMA filed its motion prior to the 

presentation of oral testimony in the 

direct phase of the proceeding. In 

addition, the Judges, sua sponte, 

referred a material question of 

substantive law to the Register after the 

close of the record. 

1. Ringtones 

In its motion, RIAA sought referral to 

the Register of a novel question of law 

regarding the eligibility of ringtones for 

licensing under section 115. See Motion 

of [RIAA] Requesting Referral of a Novel 

Question of Substantive Law (filed 

August 1, 2006). After considering the 

views of all of the participants, the 

Judges granted RIAA’s motion in part 

and referred to the Register two novel 

questions of law regarding (1) whether 

ringtones—regardless of whether the 

ringtone is monophonic, polyphonic or 

a mastertone—constitute delivery of a 

digital phonorecord subject to statutory 

licensing under section 115 and (2) if so, 

what legal conditions and/or limitations 

4512 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

5 DiMA defined ‘‘interactive streaming’’ for 

purposes of its requested referral as ‘‘the playing of 

a specific sound recording in response to a 

listener’s request without the creation of an audio 

file that remains accessible on the client computer 

beyond the playing of such sound recording.’’ See 

DiMA Motion at 1 (footnote omitted). 

6 In announcing her interim rule clarifying the 

scope and application of section 115 as it relates to 

DPDs, the Register stated: It is sufficient to note that 

the record in this rulemaking and the Cartoon 

Network opinion create sufficient uncertainty to 

make it inadvisable to engage in rulemaking activity 

based on the Office’s analysis in the DMCA Section 

104 Report. Consequently, the interim rule does not 

address whether streaming of music that involves 

the making of buffer copies, but which makes no 

further copies, falls within the section 115 

compulsory license, or whether such buffer copies 

qualify as DPDs. Compulsory License for Making 

and Distributing Phonorecords, Including Digital 

Phonorecord Deliveries: Interim Rule and request 

for comments. 73 FR 66173, 66177 (November 7, 

2008). 

7The Memorandum Opinion was published in 

the Federal Register on August 19, 2008. 73 FR 

48396. 

would apply. See Order Granting in Part 

the Request for Referral of a Novel 

Question of Law, Docket No. 2006–3 

CRB DPRA (August 18, 2006). On 

October 16, 2006, the Register 

transmitted a Memorandum Opinion to 

the Judges that addressed the novel 

questions of law, concluding: 

[R]ingtones (including monophonic and 

polyphonic ringtones, as well as mastertones) 

qualify as digital phonorecord deliveries 

(‘‘DPDs’’) as defined in 17 U.S.C. 115. * * * 

[W]hether a particular ringtone falls within 

the scope of the statutory license will depend 

primarily upon whether what is performed is 

simply the original musical work (or a 

portion thereof), or a derivative work (i.e., a 

musical work based on the original musical 

work but which is recast, transformed, or 

adapted in such a way that it becomes an 

original work of authorship and would be 

entitled to copyright protection as a 

derivative work). 

The Register’s Memorandum Opinion 

was published in the Federal Register 

on November 1, 2006. 71 FR 64303. 

2. Interactive Streaming 

DiMA requested referral to the 

Register of what it described as a novel 

question of law as to whether 

‘‘interactive streaming’’ constituted a 

DPD under section 115. See Motion of 

[DiMA] Requesting Referral of a Novel 

Material Question of Substantive Law 

(‘‘DiMA Motion’’) (filed January 7, 

2008).5 Copyright Owners opposed 

DiMA’s motion and RIAA took no 

position on it. The Judges heard oral 

arguments on the motion on January 28, 

2008. 

On February 4, 2008, the Judges 

denied DiMA’s motion, finding that the 

definition of ‘‘interactive streaming’’ 

presented a question of fact and not a 

question of law as required by section 

802(f)(1)(B). See Order Denying Motion 

of [DiMA] for a Referral of a Novel 

Material Question of Substantive Law, 

Docket No. 2006–3 CRB DPRA 

(February 4, 2008). We stated: 

During oral argument, there was much 

discussion regarding the term ‘‘interactive 

streaming.’’ The term is neither defined nor 

mentioned in the Copyright Act, and it is 

apparent that there is not agreement among 

the parties as to the meaning of the term. 

Given these two factors, the Judges determine 

that there is not a ‘‘novel question of 

substantive law concerning an interpretation 

of those provisions’’ of the Copyright Act. 17 

U.S.C. 802(f)(1)(B). Rather, the matter of what 

is ‘‘interactive streaming’’ is a factual 

question. The Register could not render a 

determination as to whether ‘‘interactive 

streaming’’ is a digital phonorecord delivery 

without inquiring into the factual 

circumstances and types of activities that 

could be considered ‘‘interactive streaming,’’ 

and the extent to which these factual 

circumstances and types of activities result in 

reproductions of musical works. That is not 

a matter of substantive law as required by the 

statute. 

Order Denying Motion of DiMA at 2. The 

correctness of our conclusion that 

streaming is not a defined term or 

behavior was confirmed subsequently 

by the witness testimony. 5/14/08 Tr. at 

6594–95 (Kirk) (‘‘I mean, one of the 

wonderful things about computers on 

the internet is they offer you a number 

of different ways to do things. And 

streaming can encompass a whole range 

of behaviors.’’); see also 5/15/08 Tr. at 

6664–65; 5/21/08 Tr. at 7598 (MayerPatel) (‘‘Yes, streaming is—is a 

reasonably broad word and, for the most 

part, it’s generally understood to mean 

making use of data as it arrives as 

opposed to waiting for the entire data to 

arrive and then making use of it.’’). The 

Register also concluded that this matter 

has many uncertainties.6

3. Authority Over Terms 

After closing arguments, the Judges, 

on their own motion, referred to the 

Register a material question of 

substantive law concerning the division 

of authority between the Judges and the 

Register to establish terms under the 

Section 115 statutory license. See Order 

Referring Material Question of 

Substantive Law, Docket No. 2006–3 

CRB DPRA (July 25, 2008). On 

August 8, 2008, the Register transmitted 

a Memorandum Opinion to the Judges 

that addressed the material question of 

substantive law.7 See infra at section V. 

III. The Section 115 License 

A. Overview of the License 

Created shortly after the turn of the 

twentieth century, the Section 115 

compulsory license represents 

Congress’s first effort to balance the 

exclusive rights of copyright owners 

with the concern of public access to 

protected works. Despite the almost 

100-year history of the license, our 

proceeding marks only the second time 

that a governmental body other than the 

Congress is establishing the royalty rates 

to be paid for reproductions of musical 

works by copyright users. 

At the time of Congress’s major 

revision of the copyright laws in 1909, 

protection for musical works was a longrecognized concept. The protection 

extended to performances of musical 

works and to copies of sheet music 

made by songwriters and music 

publishers. However, the year before, 

the United States Supreme Court 

decided in White-Smith Music 

Publishing Co. v. Apollo Co., 

209 U.S. 1 (1908), that piano rolls did 

not embody a system of notation that 

could be read and therefore were not 

‘‘copies’’ of musical works within the 

meaning of the existing copyright laws, 

but rather were merely parts of devices 

for mechanically performing the music. 

Reacting to this decision, Congress 

extended the protection of musical 

works to include the right to make 

mechanical devices embodying musical 

works but without extending the 

protection to the mechanical devices 

themselves. H.R. Rep. No. 60–2222, at 9 

(1909). The extension of protection was 

tempered, however, by a concern about 

monopolistic control of music for 

recording purposes by the makers of 

piano rolls and phonorecords. The right 

of a copyright owner to mechanical 

control of his or her musical work was 

limited by a compulsory license once 

the owner made or authorized the 

recording of his or her musical 

composition; hence the now common 

term ‘‘mechanical license.’’ 17 U.S.C. 1 

(1909). Upon payment of a royalty rate 

of 2¢ per ‘‘mechanical,’’ any person was 

free to manufacture and distribute a 

reproduction of a musical work. 

Congress revisited the mechanical 

license in the 1976 copyright law 

revision, now found in section 115 of 

title 17 of the United States Code, 

clarifying that the license cannot be 

invoked unless and until a nondramatic 

musical work embodied in a 

phonorecord has been distributed to the 

public under authority of the copyright 

owner (clarifying that a demonstration 

record or tape is not subject to the 

license); that the license is not available 

for duplicating, without authorization, 

another’s sound recording of a musical 

work; that the license for phonorecords 

is not transferable; and that compulsory 

licensees are granted some latitude in 

the arrangement of their version of the 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4513 

8Congress did make a slight adjustment to section 

115 when it abolished the Copyright Royalty 

Tribunal in 1993 by authorizing copyright 

arbitration royalty panels (‘‘CARPs’’) to adopt 

terms—and in particular notice and recordkeeping 

terms—in rate adjustment proceedings. Copyright 

Royalty Tribunal Reform Act of 1993, Public Law 

No. 103–198, 107 Stat. 2304. This authorization was 

carried forward to the Judges upon abolition of the 

CARP system. Copyright Royalty and Distribution 

Reform Act of 2004, Public Law No. 108–419, 118 

Stat. 2341. 

9At the time the 1976 Copyright Act was enacted, 

the other compulsory licenses were set forth in 17 

U.S.C. 111, 116 and 118. 

10Specifically, Congress charged the Register 

with the authority to promulgate regulations 

governing the notice of intention to obtain the 

section 115 license as well as the monthly and 

annual statements of account. See 17 U.S.C. 

115(b)(1) and (c)(3) (1978); see also 37 CFR 201.18 

(notice of intent to obtain license) and 201.19 

(statements of account). 

recorded musical work. The Copyright 

Office was directed to establish 

requirements (terms) for the notice of 

intention to obtain the section 115 

license, as well as the payment of 

royalties. These regulations are 

currently found at 37 CFR 201.18 and 

201.19. The 2¢ per phonorecord royalty 

fee adopted under the 1909 Act was 

retained, but the Copyright Royalty 

Tribunal was instructed to conduct a 

proceeding to adjust the rate. That 

proceeding is discussed infra at section 

III.B. 

Change came to the section 115 

license almost 20 years later 8 with the 

passage of the Digital Performance Right 

in Sound Recordings Act, Public Law 

No. 104–39, 109 Stat. 336. Of the 

amendments made by this Act, the most 

important is extension of the license to 

‘‘digital phonorecord deliveries,’’ which 

the statute defines as 

each individual delivery of a phonorecord by 

digital transmission of a sound recording 

which results in a specifically identifiable 

reproduction by or for any transmission 

recipient of a phonorecord of that sound 

recording, regardless of whether the digital 

transmission is also a public performance of 

the sound recording or any nondramatic 

musical work embodied therein. A digital 

phonorecord delivery does not result from a 

real-time, non-interactive subscription 

transmission of a sound recording where no 

reproduction of the sound recording or the 

musical work embodied there is made from 

the inception of the transmission through to 

its receipt by the transmission recipient in 

order to make the sound recording audible. 

17 U.S.C. 115(d). The license now 

covers digital transmissions of 

phonorecords, in addition to the 

physical copies, such as compact discs 

(CDs), vinyl and cassette tapes, and, 

unlike the license for physical 

phonorecords, the license for DPDs is 

transferable. Congress also created a 

subset of the DPD, the ‘‘incidental 

digital phonorecord delivery’’ (‘‘IDPD’’), 

and although it did not define what 

constitutes an IDPD, instructed the 

Judges to adopt royalty terms and rates 

that distinguish between DPDs and 

IDPDs. 

In describing this history and 

structure of the section 115 license, the 

Judges note how extensive and detailed 

is its operation, particularly with 

respect to the regulations adopted by the 

Copyright Office. The complexity of 

compliance, and the associated 

transactions costs, create a curious 

anomaly: virtually no one uses section 

115 to license reproductions of musical 

works, yet the parties in this proceeding 

are willing to expend considerable time 

and expense to litigate its royalty rates 

and terms. The Judges are, therefore, 

seemingly tasked with setting rates and 

terms for a useless license. The 

testimony in this proceeding makes 

clear, however, that despite its disuse, 

the section 115 license exerts a ghost-inthe-attic like effect on all those who live 

below it. See 5/12/08 Tr. at 5757:10–17 

(A. Finkelstein). Thus, the rates and 

terms that we set today will have 

considerable impact on the private 

agreements that enable copyright users 

to clear the rights for reproduction and 

distribution of musical works. 

B. History of the Section 115 Rates 

When Congress created the section 

115 license as part of the 1909 

Copyright Act, it set the statutory rate 

for the making and distributing of 

physical phonorecords at 2¢ for each 

musical work embodied in the 

phonorecord. 17 U.S.C. 1(e) (1909). This 

rate remained in effect until Congress 

revised the copyright laws in 1978, with 

the passage of the 1976 Copyright Act, 

Public Law No. 94–553, 90 Stat. 2541. 

In the 1976 Copyright Act, Congress 

codified the mechanical compulsory 

license as section 115 and raised the 

statutory rate to 2.75¢ per phonorecord 

or .6¢ per minute of playing time or 

fraction thereof, whichever amount was 

larger. 17 U.S.C. 115(c)(2) (1978). 

Congress also determined that future 

adjustments of the section 115 rates 

would not be set by statute but rather 

would be made by the Copyright 

Royalty Tribunal (‘‘CRT’’), an 

administrative body created by Congress 

in the 1976 Act to administer all of the 

compulsory licenses.9 See H.R. Rep. No. 

94–1476, at 111 (1976) (‘‘This rate will 

be subject to review by the [CRT], as 

provided in section 801, in 1980 and at 

10-year intervals thereafter.’’); see also 

17 U.S.C. chapter 8 (1978). With regard 

to the section 115 license, the CRT was 

tasked with the job of setting 

‘‘reasonable’’ royalty rates informed by 

a set of four delineated factors. 17 U.S.C. 

801(b)(1) (1978). The CRT had no 

authority to set terms for the license; 

rather, Congress delegated that authority 

to the Register of Copyrights.10

Pursuant to its statutory directive, the 

CRT conducted the first, and only other, 

contested proceeding to set rates for the 

section 115 compulsory license, which 

it began in 1980. 45 FR 63 (January 2, 

1980). The copyright owners were 

represented by, among others, NMPA 

and the Nashville Songwriters 

Association International, while the 

copyright users were represented 

primarily by RIAA. See 46 FR 10466 

(February 3, 1981). 

After taking 46 days of testimony from 

35 witnesses which comprised over 

6,000 pages of transcripts, the CRT 

issued a lengthy decision in which it 

substantially increased the existing 

2.75¢ rate per phonorecord made and 

distributed to 4¢ per phonorecord and 

established a complex system for future 

interim adjustments during the 7-year 

license period to reflect increases in the 

average list price of record albums. Id. 

at 10467, 10485–86. Specifically, the 

CRT concluded ‘‘that the application of 

the statutory criteria [in Section 

801(b)(1)] to the evidence in this 

proceeding demonstrates that the 

mechanical royalty rate must be 

adjusted to either four cents, or threequarters of one cent per minute of 

playing time or fraction thereof, 

whichever amount is larger.’’ Id. at 

10485. With respect to future interim 

adjustments, the CRT found ‘‘that any 

adjustment to the rate should and must 

be directly related to the retail list price 

of records, now and in the future.’’ Id. 

The United States Court of Appeals 

for the District of Columbia Circuit 

upheld the CRT’s determination of the 

rates but set aside the CRT’s mechanism 

for adjusting the rates within the 

licensing period as being beyond the 

CRT’s statutory authority. Recording 

Industry Ass’n. of America v. Copyright 

Royalty Tribunal, 662 F.2d 1 (D.C. Cir. 

1981). The court remanded the case to 

the CRT ‘‘for the limited purpose of 

allowing the Tribunal to consider 

whether it wishes to adopt an 

alternative scheme for interim 

adjustments.’’ 46 FR 55276 (November 

9, 1981). Upon remand, the CRT 

adopted automatic adjustments to occur 

in 1983, 1984 and 1986. By 1986, the 

rate had been increased to the larger of 

5¢ per musical work or .95¢ per minute 

of playing time or fraction thereof. 46 

4514 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

11The Register still retained her authority over 

the notice of intention to obtain the license and the 

monthly and annual statements of account. 

12We are making two technical amendments in 

the regulatory text of this final rule to correct two 

errors that appeared in the proposed regulatory text. 

Both corrections are in § 385.13 of title 37 of the 

Code of Federal Regulations. In the second sentence 

of § 385.13(a)(1), the reference to § 385.12(b)(1) is 

changed to § 385.12(b)(3); and in the first sentence 

of § 385.13(a)(2), the reference to § 385.12(b)(3) is 

changed to § 385.12(b)(1). 

13The requirement that a rate settlement must be 

offered for public comment without consequence is 

curious but apparently intentional. Only parties to 

a proceeding have a voice in whether the settlement 

is adopted, an apparent effort to encourage those 

who will be bound by the rates and terms of a 

proceeding to actively engage in the proceeding 

rather than sit on the sidelines and attempt to later 

seek to influence the outcome. There is no 

legislative history on this point. 

FR 66267 (December 23, 1981); see also 

37 CFR 255.3(a)–(c). 

The next adjustment of the SECTION 

115 rates was scheduled to begin in 

1987. On March 18, 1987, the CRT 

received a joint proposal from NMPA 

and SGA, on behalf of the copyright 

owners, and RIAA, on behalf of 

copyright users, seeking adoption of 

rates voluntarily negotiated by the 

parties. The settlement, which was 

ultimately adopted by the CRT, set the 

rate at 5.25¢ per track beginning on 

January 1, 1988, and established a 

schedule of rate increases based on the 

percentage change in the CPI every two 

years over the next 10 years, except that 

the rates would remain the same when 

the CPI declined and could not be 

increased in any single adjustment by 

more than 25%. See 52 FR 22637 (June 

15, 1987). Over the ensuing decade, the 

rate increased until 1996, when the rate 

was 6.95¢ per track or 1.3¢ per minute 

of playing time or fraction thereof. See 

37 CFR 255.3(d)–(h). 

Congress abolished the CRT in 1993 

and replaced it with the Copyright 

Arbitration Royalty Panel (‘‘CARP’’) 

system. See Copyright Royalty Tribunal 

Reform Act of 1993, Public Law No. 

103–198, 107 Stat. 2304. The CARPs 

were to set reasonable rates and, for the 

first time, terms for the section 115 

license, subject to review by the 

Librarian of Congress (‘‘Librarian’’).11

Because the rates set by the CRT 

pursuant to the 1987 settlement were set 

to expire on December 31, 1997, the 

year 1997 was a window year for 

adjusting the section 115 rates. The first 

step in the process of adjusting rates 

under the CARP system was for the 

Librarian to initiate a voluntary 

negotiation period to allow copyright 

owners and users to negotiate terms and 

rates of the license. The Librarian set the 

negotiation period to run from July 17, 

1996, through December 31, 1996. 61 FR 

37213 (July 17, 1996). The second step 

of the process was to convene a CARP 

to determine reasonable terms and rates 

for parties not subject to a negotiated 

agreement. The convening of a CARP 

was not necessary because NMPA, SGA 

and RIAA were able, after lengthy 

negotiations, to reach an agreement 

regarding the adjustment of the physical 

phonorecord and digital phonorecord 

delivery royalty rates. Under the 

settlement, which was ultimately 

adopted by the Librarian, the rate for 

physical phonorecords was set at 7.1¢ 

per track beginning on January 1, 1998, 

and a schedule was established for fixed 

rate increases every two years over the 

next 10-year period with the rate 

beginning on January 1, 2006, being the 

larger of 9.1¢ per track or 1.75¢ per 

minute of playing time or fraction 

thereof. See 37 CFR 255.3(i)–(m); see 

also, 63 FR 7288 (February 13, 1998). 

The rates adopted for digital 

phonorecord deliveries for the 10-year 

period were the same as those set for 

physical phonorecords, and the rates for 

incidental DPDs were deferred until the 

next scheduled rate proceeding. See 37 

CFR 255.5, 255.6; see also, 64 FR 6221 

(February 9, 1999). These rates for 

physical and digital phonorecords are 

still in effect. 

C. The Parties’ Settlement of Rates and 

Terms for Conditional Downloads, 

Interactive Streaming and Incidental 

Digital Phonorecord Deliveries 

During the latter stages of the rebuttal 

hearings, counsel for Copyright Owners, 

RIAA and DiMA advised the Judges that 

they had reached a global settlement 

with respect to limited downloads, 

interactive streaming, and ‘‘all known 

incidental DPDs.’’ Copyright Owners 

PFF at ¶ 199. The parties announced 

their intention to file their settlement 

just a short period of time before the 

October 2 deadline for the Judges’ initial 

determination, expressing concern that 

it might influence our decision with 

respect to physical phonorecords, 

downloads and ringtones, and finally 

did so after we issued an Order 

compelling them to submit the 

settlement no later than noon on 

September 22, 2008. Order Setting 

Deadline to File Settlement, Docket No. 

2006–3 CRB DPRA (September 17, 

2008). Upon receipt of the agreement 

and pursuant to 17 U.S.C. 801(b)(7)(A), 

we published it in the Federal Register. 

See, 73 FR 57033 (October 1, 2008).12

No objections were filed by any of the 

participants to the proceeding. A joint 

comment was received from CTIA—The 

Wireless Association and the National 

Association of Broadcasters arguing that 

adoption of the settlement is beyond the 

Judges’ authority, contrary to law and 

bad policy. 

Our jurisdiction with respect to the 

settlement is clear. Section 801(b), 

entitled ‘‘FUNCTIONS’’ of the Copyright 

Royalty Judges, sets forth our 

responsibilities in eight specific 

subsections. Subsection (7)(A) directs 

us: 

To adopt as a basis for statutory terms and 

rates or as a basis for the distribution of 

statutory royalty payments, an agreement 

concerning such matters reached among 

some or all of the participants in a 

proceeding at any time during the 

proceeding, except that— 

(i) the Copyright Royalty Judges shall 

provide to those that would be bound by the 

terms, rates, or other determination set by 

any agreement in a proceeding to determine 

royalty rates an opportunity to comment on 

the agreement and shall provide to 

participants in the proceeding under section 

803(b)(2) that would be bound by the terms, 

rates, or other determination set by the 

agreement an opportunity to comment on the 

agreement and object to its adoption as a 

basis for statutory terms and rates; and 

(ii) the Copyright Royalty Judges may 

decline to adopt the agreement as a basis for 

statutory terms and rates for participants that 

are not parties to the agreement, if any 

participant described in clause (i) objects to 

the agreement and the Copyright Royalty 

Judges conclude, based on the record before 

them if one exists, that the agreement does 

not provide a reasonable basis for setting 

statutory terms or rates. 

17 U.S.C. 801(b)(7)(A). Thus, we are 

mandated to adopt the determination of 

the settling parties to a distribution and 

rate proceeding. If it is a rate proceeding 

(but not a distribution proceeding), we 

must afford those who would be bound 

by the settled rates and terms, but are 

not parties to the proceeding, an 

opportunity to comment and we must 

afford the parties to the proceeding an 

opportunity to object to the settlement. 

The comments received from nonparties have no bearing on the outcome 

since the statute does not grant us 

authority to reject or amend the 

settlement on that basis. Only if an 

objection is received by one or more of 

the parties are we given any discretion 

over the settlement, and then we are 

limited to rejecting it if we determine 

that the settlement ‘‘does not provide a 

reasonable basis for setting statutory 

rates and terms.’’ Id.13 Chapter 8 of the 

Copyright Act encourages settlements 

among the parties. The procedure in 

section 803 incorporates mandated 

settlement negotiations. 

In the present case and as noted 

above, we have published the settlement 

in the Federal Register. Unsurprisingly, 

none of the parties have objected. 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4515 

14The Joint Comment of CTIA-The Wireless 

Association and the National Association of 

Broadcasters argues that the Judges ‘‘may not adopt 

a rule that is contrary to law, regardless of whether 

or not the parties to the proceeding may agree.’’ 

Joint Comment at 6. As discussed above, the statute 

provides that the Judges adopt settlements, except 

when specific conditions occur. By adopting a 

settlement when these conditions are absent, the 

Judges are adopting a regulation that follows the 

law. Further review of settlements as proposed in 

the Joint Comment will require amendments to 17 

U.S.C. 801(b)(7)(A). As the Joint Comment suggests, 

it may be good public policy for the Judges to have 

discretion to decide if the terms of a settlement 

should be adopted. Had CTIA-The Wireless 

Association and the National Association of 

Broadcasters participated in this proceeding, their 

objections to the settlement and proposed revisions 

may have been the basis for considering the merits 

of the settlement. 

15 In her review of substantive questions of 

material law in Docket Nos. 2005–5 CRB DTNSRA 

and 2006–1 CRB DSTRA, the Register concluded 

that it was legal error for the Judges not to set forth 

a standalone rate for the section 112 license for 

preexisting subscription services and new 

subscription services. 73 FR 9143 (February 19, 

2008). The rates and terms for these services, 

however, were adopted pursuant to settlements of 

the parties under section 801(b)(7)(A) and were not 

a final determination of the Judges. See, 73 FR at 

9145 (Register does not address the statutory 

limitations imposed on the Judges with regard to 

settlements in merely stating, without more, that: 

‘‘The Copyright Royalty Judges have authority to 

accept or reject the settlement and it is the resulting 

Final Order which is then subject to review by the 

Register’’). 

Therefore, we have no choice but to 

adopt it as the basis for the necessary 

statutory rates and terms applicable to 

the corresponding licensed activities.14

In doing so, we observe that the 

provisions of the settlement do not 

constitute a finding of fact or a 

resolution of law by us. The statute 

provides that the settlement is an 

adjustment of rates and terms by the 

parties that we must adopt. We 

emphasize this statutory distinction to 

clarify the procedure applicable to the 

settlement. The provisions of 17 U.S.C. 

802(f)(1)(D) permit the Register of 

Copyrights to review material questions 

of substantive law that are resolutions 

that are part of our final determination; 

however, inasmuch as the settlement 

does not represent a resolution of the 

Judges, the Register’s review is not part 

of the procedure applicable to the 

relevant rates and terms established by 

this settlement.15

IV. Determination of Royalty Rates 

A. Application of Section 115 

Based on the applicable law and 

relevant evidence received in this 

proceeding, the Copyright Royalty 

Judges must determine rates for the 

section 115 musical works reproduction 

licenses utilized by record companies 

and other music distributors in the 

distribution of phonorecords of such 

works. 

The Copyright Act requires that the 

Copyright Royalty Judges establish rates 

for the section 115 license that are 

reasonable and calculated to achieve the 

following four specific policy objectives: 

(A) To maximize the availability of 

creative works to the public; (B) to 

afford the copyright owner a fair return 

for his creative work and the copyright 

user a fair income under existing 

economic conditions; (C) to reflect the 

relative roles of the copyright owner and 

the copyright user in the product made 

available to the public with respect to 

relative creative contribution, 

technological contribution, capital 

investment, cost, risk, and contribution 

to the opening of new markets for 

creative expression and media for their 

communication; and (D) to minimize 

any disruptive impact on the structure 

of the industries involved and on 

generally prevailing industry practices. 

17 U.S.C. 115(c) and 17 U.S.C. 801(b)(1). 

Having carefully considered the 

relevant law and the evidence received 

in this proceeding, the Copyright 

Royalty Judges determine that the 

appropriate section 115 license rate is 

the greater of 9.1¢ per song or 1.75¢ per 

minute of playing time (or fraction 

thereof) for physical phonorecord 

deliveries and for permanent digital 

downloads; and, further, that the 

appropriate Section 115 license rate is 

24¢ for ringtones. Section 803(d)(2)(B) 

governs the effective date of the rates 

established in this proceeding. 

The applicable rate structure for the 

section 115 license is the starting point 

for the Copyright Royalty Judges’ 

determination. 

B. The Rate Proposals of the Parties and 

the Appropriate Royalty Structure for 

Section 115 Licenses 

1. Rate Proposals 

The contending parties propose 

several different rate structures. In its 

second amended rate proposal, RIAA 

offers a percentage of wholesale 

revenues approach as its preferred 

alternative, with a rate of 9% of all-in 

wholesale revenues applicable to 

physical product and permanent 

downloads and a rate of 15% of all-in 

wholesale revenues applicable to 

ringtones. As its less preferred 

alternative, RIAA proposes a ‘‘pennyrate’’ ranging from 3.6¢ per track to 

9.45¢ per track depending on the 

corresponding level of wholesale price 

associated with the track for tracks 

reproduced on physical product or as 

permanent downloads. As part of this 

alternative approach, RIAA proposes a 

separate rate of 18¢ per ringtone. RIAA 

Second Amended Rate Proposal (July 2, 

2008) at 1–6. 

DiMA offers a second amended rate 

proposal applicable only to permanent 

downloads that is formulated as a 

‘‘greater of’’ comparison between 6% of 

applicable receipts and 4.8¢ per track 

for singles or 3.3¢ per track for tracks 

sold as part of bundles. DiMA Second 

Amended Rate Proposal (July 2, 2008) 

at 3. 

By contrast, the Copyright Owners’ 

second amended rate proposal presents 

only a ‘‘penny-rate’’ choice for physical 

product and permanent downloads, 

equal to the greater of 12.5¢ per song or 

2.4¢ per minute of playing time for 

physical product and the greater of 15¢ 

per track or 2.9¢ per minute of playing 

time for permanent downloads. These 

penny rates would be additionally 

subject to a ‘‘periodic’’ adjustment 

ostensibly to reflect the change in the 

consumer price index (CPI–U) over such 

period. However, in the case of 

ringtones, Copyright Owners propose a 

tri-partite ‘‘greater of’’ comparison 

between (1) 15% of all revenue received 

in conjunction with the licensed 

product or service; (2) 33.3% of the total 

content costs paid for mechanical rights 

to musical compositions and rights to 

sound recordings; and (3) 15¢ per 

ringtone subject to periodic adjustments 

for inflation as measured by the 

consumer price index (CPI–U) over such 

period. Copyright Owners’ Second 

Amended Rate Proposal (July 2, 2008) at 

1–2. 

2. Rate Structure 

From the evidence of record, the 

Copyright Royalty Judges conclude that 

several factors tip the scales in favor of 

a usage fee structure for those licenses 

for which contested proposals have 

been submitted by the parties. First, 

unlike our recent determination in the 

SDARS proceeding, here we are not 

faced with difficult or intractable 

problems in measuring usage nor do we 

find that a percentage of revenue 

approach provides the most efficient 

mechanism for capturing the value of 

the reproduction and distribution rights 

at issue here. See 73 FR at 4085–4087. 

Second, although not presenting as 

many of the same problems as the 

proposed revenue-based metrics in 

Webcaster II (see 72 FR at 24088– 

24090), we conclude that the evidence 

in the record here is that enough 

difficulties remain with the revenuebased proposals submitted by the 

parties to determine that it is more 

reasonable to adopt a usage-based fee 

structure for the licenses still at issue in 

this proceeding. 

4516 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

16 In the SDARS proceeding, the Judges 

concluded that: ‘‘Indeed, in stark contrast to the 

record in Webcaster II, neither the SDARS nor 

SoundExchange provided substantial evidence to 

indicate that a true per performance rate was 

susceptible of being calculated by the parties to this 

proceeding. Therefore, we find that a revenue-based 

measure is currently the most effective proxy for 

capturing the value of the performance rights at 

issue here, particularly in the absence of any 

substantial evidence of how some readily calculable 

true per performance metric could be applied to the 

SDARS.’’ 73 FR 4087. 

17For example, accounting differences between 

for-profit entities and not-for-profit entities are not 

an issue in the instant proceeding. Similarly, in 

contrast to commercial webcasting, identifying 

relevant user revenues here does not appear to be 

as complex across the spectrum of potential 

mechanical license users as doing so for a number 

of commercial webcasters (such as some 

simulcasters) who offer features and formats either 

unrelated to music or who only partially employ 

music as part of their programming. See Webcaster 

II, 72 FR at 24089. 

18 In addition, auditing and enforcement costs are 

likely to be lower. Fewer data elements are required 

to be collected and reviewed under the existing 

penny-rate system as compared to a revenue-based 

metric. Copyright Owners PFF at ¶¶ 595–596 and 

648. 

In the instant proceeding, measuring 

usage is straightforward. Each 

reproduction of the musical work on a 

physical CD (or some other older 

physical format such as cassette tapes or 

vinyl LPs), a permanent digital 

download or a digital ringtone counts as 

a use of the musical work. No proxies 

need be formulated to establish the 

number of such reproductions. They are 

readily calculable as the number of 

units in transactions between the 

parties. See 2/7/08 Tr. at 2173–4 

(Landes). Such ease of calculation with 

respect to usage was not observed by the 

Judges in the SDARS proceeding.16

Indeed, in the SDARS proceeding, the 

best the parties could offer were ‘‘per 

play’’ and ‘‘per broadcast’’ alternatives 

that were problematic proxies for a 

usage metric. Adjustments aimed at 

improving the ‘‘per play’’ and ‘‘per 

broadcast’’ proposals in that proceeding 

resulted in additional ambiguities rather 

than more precision. See 73 FR at 4085– 

4087. In the instant case, measuring the 

quantity of reproductions presents no 

such problems. This ease of application 

offers an efficiency in valuing the rights 

at issue not available under the 

percentage of revenue alternatives 

offered by the parties in this proceeding. 

In contrast to the ease of applying a 

usage metric in this proceeding, some of 

the difficulties associated with a 

percentage of revenue approach cited in 

Webcaster II are also discernible in the 

instant matter. In Webcaster II, we 

concluded that the evidence in the 

record of that proceeding weighed in 

favor of a per performance usage fee 

structure for both commercial and 

noncommercial webcasters, but we 

further suggested that, in the absence of 

some of the more egregious problems 

noted therein, the use of a revenuebased metric as a proxy for a usagebased metric might be reasonable. 

Webcaster II, 72 FR at 24090. 

Unfortunately, at least some of the same 

salient difficulties associated with a 

percentage of revenue approach in 

Webcaster II appear in this proceeding 

as well. 

In particular, one of the more 

intractable problems associated with the 

revenue-based metrics proposed by the 

parties in Webcaster II, 72 FR at 24090, 

was the parties’ strong disagreement 

concerning the definition of revenue for 

certain services. This was further 

complicated by questions related to 

applying the same revenue-based metric 

to noncommercial as well as 

commercial services. See Webcaster II, 

72 FR 24094 at n.15. Although the same 

degree of difficulty is not presented by 

the applicable facts in this proceeding,17

yet some similar difficulties remain. For 

example, even in those cases where 

opposing parties to this proceeding 

proposed a revenue-based metric, there 

were important differences and 

disagreements related to the definition 

of revenues in their proposals. Compare 

Copyright Owners PFF at ¶¶ 610, 614– 

22, Copyright Owners RFF at ¶ 667 and 

DiMA PFF at ¶¶ 219–220, 237–9, DiMA 

RFF at ¶¶ 105, 113–4, DiMA RCL ¶ 39 

and RIAA PFF at ¶¶ 1603–4, 1620–2, 

1628–9, 1632–47, 1650, 1653, 1655, 

1663–4, RIAA PCL at ¶ 182–3, RIAA 

RFF at ¶¶ 457, 462–5. 

Moreover, while such differences may 

be surmountable for some formats, in 

the case of the physical formats and 

permanent digital downloads that 

account for the overwhelming bulk of 

mechanical license use at issue in this 

proceeding, the parties have until now 

lived under a penny-rate standard not a 

revenue-based regime. Therefore, the 

parties are less familiar with the 

operation of a revenue-based metric. 

The value of such familiarity lies in its 

contribution towards minimizing 

disputes and, concomitantly, 

constraining transactions costs.18

Therefore, the absence of such 

familiarity with respect to the large 

majority of transactions at issue in this 

proceeding may well give rise to higher 

transactions costs, stemming from the 

greater likelihood of disputes over 

component definitions of revenue. 

Continuing the familiar penny-rate 

system will avoid such disputes. 

In addition, some higher costs to 

Copyright Owners will be avoided by 

leaving publisher-songwriter contracts 

structured on a penny-rate system, and 

not having to modify them to 

accommodate a revenue-based structure. 

5/14/08 Tr. at 6427–37 (Faxon). 

RIAA’s shrill contention that a pennyrate structure ‘‘would be disruptive as 

consumer prices continue to decline’’ 

and should, therefore, be replaced by a 

percentage rate system in order to 

satisfy 801(b) policy considerations 

related to the minimization of 

disruption (see, for example, the RIAA 

contention summarized in RIAA PFF at 

¶ 1478) is not supported by the record 

of evidence in this proceeding. As the 

Judges indicated in the SDARS 

proceeding, ‘‘disruption’’ typically 

refers to an adverse impact that is 

substantial, immediate and irreversible 

in the short-run because there is 

insufficient time for the industry 

participants to adequately adapt to the 

changed circumstances and, as a 

consequence, such adverse impacts 

threaten the viability of the music 

delivery currently offered under the 

license in question. See 73 FR at 4097. 

In the instant proceeding RIAA offers no 

persuasive evidence of a causal 

relationship between any specified past 

level of record industry revenue 

shortfalls and the structure (as 

distinguished from the amount) of this 

one component of industry expenses (as 

distinguished from several other major 

cost components) over the same period. 

Nor does the RIAA offer any persuasive 

evidence that would in any way 

quantify any claimed adverse impact on 

projected future revenues stemming 

from the continued application of a 

penny-rate structure over the course of 

the license period in question. 

Then too, RIAA’s and DiMA’s 

asserted claims of the relative advantage 

of their proposed revenue-based 

structures fail to adequately consider 

negative impacts on copyright owners. 

For example, RIAA’s claim that a pure 

percentage rate allows more pricing 

flexibility than a penny rate appears 

exaggerated and unfairly ignores the 

disadvantages of the pure percentage 

rate for copyright owners. RIAA 

contends that ‘‘With a fixed cents rate, 

record companies cannot lower their 

prices below a certain threshold without 

losing the margin needed to cover their 

very significant costs.’’ (See this RIAA 

contention in RIAA PFF at ¶ 1503). Yet 

the record of evidence in this 

proceeding does not identify such a 

threshold, but rather indicates that even 

under the current penny rate the record 

companies have been able to reduce 

prices. See, for example, 5/14/08 Tr. at 

6425–26 (Faxon); 2/12/08 Tr. at 2683 

(Firth); 2/5/08 Tr. at 1666–7 (Peer); 2/ 

14/08 Tr. at 3376, 3379–80 (A. 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4517 

19 It is also not clear from the record of evidence 

how much of record company costs savings have 

been translated into consumer price reductions and 

how much have been retained by the companies in 

order to preserve profit margins. 

20 DiMA’s offer of a dual minimum penny rate 

(i.e., with two different minima for stand-alone 

tracks and bundled tracks) as part of its percentagebased proposal ostensibly aims to mitigate this 

adverse effect in exchange for less than full 

flexibility. Thus, the DiMA proposal adds the 

complexity and costs of multiple measurements, 

but does not offer persuasive evidence that such 

costs are reasonably incurred relative to the more 

modest potential benefits to users (i.e., some price 

flexibility although less than full flexibility) and 

owners (i.e., no zero payments for use of additional 

musical work although differential payments for 

use of same work still possible) flowing from its 

proposed rate structure. 

21While both Copyright Owners and RIAA have 

proposed a revenue-based alternative for 

compensating ringtones and while some ringtone 

agreements in the record offer revenue-based 

compensation as one alternative in a ‘‘greater of’’ 

formulation, Copyright Owners and RIAA have not 

shown whether or how those agreements have 

overcome the hereinabove described problems with 

the parties’ revenue-based proposals. Therefore, in 

light of the efficiency of administration gained from 

a single structure when spread over the much larger 

number of musical works reproduced as physical 

phonorecords or digital permanent downloads as 

compared to ringtones and the fact that both 

Copyright Owners and RIAA have also proposed a 

penny-rate alternative for ringtones, the Judges 

determine that a single penny-rate structure is best 

applied to ringtones as well as physical 

phonorecords and digital permanent downloads. 

22A ringtone is a digital audio file that is 

downloaded to a mobile phone or similar portable 

device to personalize the ring that alerts the 

consumer to an incoming call or message. 

Monophonic ringtones contain only a musical 

work’s melody (or a portion of the melody). 

Polyphonic ringtones contain a musical work’s 

melody and harmony (or a portion thereof). 

Mastertones are ringtones that are extracted from 

digital sound recordings. Mastertone sellers must 

acquire rights to both the musical work and the 

sound recording. Copyright Owners PFF at ¶ 492. 

Although the Register has determined that certain 

ringtones qualify as DPDs as defined in section 115, 

‘‘[t]he vast majority of the ringtone and mastertone 

licenses reviewed by Dr. Landes predated the 

[Register’s] Ringtone Opinion.’’ Copyright Owners 

PFF at ¶ 492. 

Finkelstein). Record companies may 

have other costs such as overhead that 

also could serve as the source for further 

potential price reductions.19 Copyright 

Owners PFF at ¶¶ 422–23. Moreover, 

this purported business flexibility 

‘‘advantage’’ raises serious questions of 

fairness precisely because the 

percentage of revenue metric may be a 

less than fully satisfactory proxy for 

measuring more usage or the actual 

intensity of the usage of the rights in 

question.20 Copyright Owners RCL at 

¶ 132. It is not fair to fail to properly 

value the reproduction rights at issue in 

this proceeding. Such a result is at odds 

with the stated policy objective of the 

statute to afford the copyright owner a 

fair return for his creative work. 17 

U.S.C. 801(b)(1). 

At the same time, DiMA contends that 

the adoption of a percentage rate 

structure would increase their 

incentives to invest more in the quality 

and breadth of their offerings and 

therefore expand the availability of 

works to the public consistent with the 

first of the four policy objectives of 

801(b). See, for example, DiMA PFF at 

¶¶ 216, 219. However, these contentions 

are related to the amount of revenue (net 

of the payment of a specific amount of 

mechanical license fees) that would 

remain to DiMA members irrespective of 

the structure of the rate. (‘‘But this 

advantage will be realized only if the 

percentage rate is not set so high (or 

accompanied by unreasonably high 

‘minima’) that it discourages 

technological experimentation.’’ DiMA 

PFF at ¶ 216, emphasis added. ‘‘A 

percentage rate can promote 

technological investment and 

innovation, and thereby expand the 

availability of works to the public, only 

if the revenue base is not overly broad.’’ 

DiMA PFF at ¶ 219, emphasis added.) 

Therefore, so far as the structure of the 

rate is concerned, there is nothing novel 

in these additional DiMA contentions 

that set them apart from the business 

flexibility arguments previously 

discussed above and found wanting. 

For all of the above reasons, we are 

persuaded that the penny-rate structure 

provides a better measure of actual 

usage than the alternatives proposed by 

parties in this proceeding and that the 

application of the penny-rate structure 

to all the licenses in contention in this 

proceeding will result in fewer overall 

transaction cost issues over the course 

of the license period compared to the 

proffered alternatives.21 While the 

problems identified above for a revenuebased proxy for usage may be remedied 

in the future by the parties in light of 

evolving circumstances, the parties’ 

proposals in this proceeding do not offer 

a sufficient basis upon which to 

determine that a revenue-based 

alternative is a reasonable alternative to 

the penny rate for the licenses at issue 

in this proceeding. 

C. The Section 115 Royalty Rates 

Chapter 8 and section 115 of the 

Copyright Act require the Judges to 

determine reasonable rates and terms of 

royalty payments for the activities 

specified by section 115 of the 

Copyright Act. 17 U.S.C. 115(c)(3)(C). 

The rates the Judges establish under 

section 115 of the Copyright Act must 

be calculated to achieve the objectives 

set forth in section 801(b)(1)(A) through 

(D) of that Act. Moreover, in 

establishing rates and terms under 

section 115, the Judges may consider 

voluntary license agreements described 

in subparagraphs (B) and (C) of section 

115(c)(3). See 17 U.S.C. 115(c)(3)(D). 

The parties in the proceeding agree 

that in determining reasonable rates, 

market benchmarks can be a useful 

starting point. RIAA PCL at ¶ 26 

(although ‘‘royalty rates set in this 

proceeding need not be market rates 

* * * market benchmarks can be a very 

useful starting point’’); Copyright 

Owners PCL at ¶ 26, quoting SDARS 

Determination (‘‘determination of a 

reasonable mechanical rate should 

‘begin with a consideration and analysis 

of [marketplace] benchmarks and 

testimony submitted by the parties, and 

then measure the rate or rates yielded by 

that process against the statutory 

objectives’ of Section 801(b). 

[M]arketplace benchmarks are critical to 

the identification of ‘the parameters of 

a reasonable range of rates within which 

a particular rate most reflective of the 

four 801(b) factors can be located.’ ’’); 

DiMA PCL at ¶ 73 (‘‘[t]he statutory 

objectives help to determine a ‘range of 

reasonable royalty rates’ along with 

various potential benchmarks from 

which the Court is free to make a 

judgment about how best to proceed,’’ 

quoting Recording Industry Assoc. of 

America v. Copyright Royalty Tribunal, 

662 F.2d 1, 9 (DC Cir. 1981)). 

As discussed below, however, the 

parties disagree about what constitutes 

the most appropriate benchmark to 

guide the Judges in determining a 

reasonable rate. Moreover, the parties do 

not limit their offer to benchmarks for 

similar products drawn from a 

marketplace in which buyers and sellers 

are similarly situated, but rather offer a 

variety of negotiated rates, legislated 

rates, and previously determined rates 

as proposed benchmarks. These various 

proffered benchmarks are described and 

discussed below. 

1. Copyright Owners’ Proposed 

Benchmarks 

Copyright Owners argue that the most 

appropriate benchmarks, as proffered by 

their expert economist, Dr. Landes, are: 

(1) Licenses for mastertones; 22 (2) 

licenses for synchronization rights; and 

(3) the royalty structure of the Audio 

Home Recording Act (‘‘AHRA’’). 17 

U.S.C. 1001–1010. These benchmarks 

are proffered to support royalty rates 

applicable to several types of uses of the 

section 115 compulsory license. 

a. Proposed Mastertone Benchmark 

With respect to mastertones, 

economic expert Dr. Landes found that 

Copyright Owners entered into 

4518 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

23 Dr. Landes reviewed and relied upon nearly 

200 third-party agreements from six different music 

publishers spanning the years 2004, 2005, and 

2006. Copyright Owners PFF at ¶ 494. The 

Copyright Owners proposed no factual findings 

with respect to the sophistication or lack thereof of 

the publishers or the third-party sellers. 

24 Dr. Landes stated that one company commonly 

licenses its recordings for a flat rate, ranging in its 

agreements from $1.00 to $1.35. Twenty percent of 

those wholesale rates yields a range of 20 cents to 

27 cents per mastertone sold. 

25RIAA’s expert economist Dr. Wildman 

contends that not only would an adjustment of the 

mastertone benchmark be required to align it with 

the market for CDs and downloads but one would 

also be required to align the mastertone benchmark 

with the market for mastertones. See Wildman WRT 

at 44–52 (citing the fact that NDMAs include 

interdependent rights in addition to mastertone 

use). Dr. Wildman concludes, however, that the 

adjustment of the mastertone rate to derive a rate 

for CDs and downloads ‘‘is all but impossible to 

make * * * with any real level of confidence.’’ 

Wildman WRT at 46. 

26The record of evidence is that mastertones have 

substantially displaced monophonic and 

polyphonic ringtones in the current marketplace. 

Rosen WDT at 5; RIAA Ex. 102–RR at Figure 2. 27 It is clear from their offer of a range of relative 

values, bounded on the low end by their ringtone 

benchmark and on the high end by their synch 

market benchmark, that even Copyright Owners 

must recognize that their relative value of music 

content benchmark evidence varies with the 

particular benchmark markets they have selected. 

This is not surprising, given the different use to 

which the ultimate consumer product in these 

markets is put and, therefore, given the relative 

difference in importance that each respective input 

plays in shaping the nature of the differing output 

in each of the respective markets in question. In 

some markets, a specific sound recording by a 

particular artist is simply more important to the 

consumers of the ultimate product than in others, 

so that its relative value compared to that of the 

underlying musical work is higher than it might be 

in other markets. This is further underlined by the 

Copyright Owners’ proposals for different shares of 

content costs varying by product market (e.g., 33% 

of content costs for ringtones compared to 

equivalent of 20% for permanent downloads). 

agreements with two different groups 

consisting of: (1) Third-party sellers of 

ringtones (ie., aggregators or cellular 

telephone companies) and (2) record 

companies. The agreements with the 

third-party sellers typically provided for 

royalty payments for the musical works 

reproduction at the greater of (1) a permastertone penny-rate minimum; (2) a 

percentage of retail price of the 

mastertones; or (3) a percentage of gross 

revenue. Copyright Owners PFF at 

¶ 494. The penny rate minimums for 

such agreements ranged from 10 cents to 

25 cents, with an average of 12.5 cents. 

Id. at ¶ 495. Retail price percentages 

ranged from 10% to 15%, with an 

average of 10.5%. Id. at ¶ 496. Stated 

gross revenue percentages ranged from 

9% to 20%. Id. at ¶ 497.23

Ringtone agreements between 

Copyright Owners and record 

companies have taken the form of either 

a (1) ‘‘New Digital Media Agreement’’ 

(‘‘NDMA’’), covering, among other 

rights, the licensing of musical 

compositions for use in mastertones; or 

(2) standalone licenses for mastertones 

only. Id. at ¶ 498. The NDMAs specified 

a tiered royalty rate for mastertones 

under which record companies agreed 

to pay a fee equal to the greater of 10 

cents, 10% [of the retail price of the 

mastertone sold], or 20% of the 

wholesale price of each mastertone sold. 

Copyright Owners PFF at ¶ 500. 

According to Copyright Owners, 

mastertones have typically been sold at 

retail prices of $1.99 or more, and music 

publishers have therefore been paid on 

a percentage of revenue rather than the 

minimum penny rate. Actual payments 

have ranged from 16 cents to 25 cents 

per mastertone.24 Copyright Owners 

PFF at ¶ 503. Dr. Landes concludes that 

Copyright Owners typically acquire 

20% of the total amount paid for 

compositions and sound recordings in 

the mastertone market. Copyright 

Owners PFF at ¶ 491. 

RIAA expert economist Dr. Wildman 

maintains that the NDMAs provide a 

blanket license, ‘‘which is a significant 

benefit to record companies because it 

avoids the complexities and 

administrative burden of individual 

license negotiations. In contrast, the 

compulsory license is a burdensome, 

song-by-song licensing process with the 

burdens falling primarily on the record 

companies.’’ Wildman WRT at ¶ 46. 

Nevertheless, Copyright Owners 

represent that standalone mastertone 

licenses, presumably with record 

companies rather than third-party 

sellers, that postdate the NDMAs have 

identical rates as those contained in the 

NDMAs. Copyright Owners PFF at 

¶ 502. 

In addition, prior to the November 

2004 execution date for the NDMAs, 

certain non-record company mastertone 

sellers obtained mastertone licenses 

under which the sellers of the 

mastertones agreed to pay music 

publishers the greater of 15 cents or 

10% of retail revenue per mastertone. 

Copyright Owners PFF at ¶ 501. 

However, Copyright Owners contend 

that the rates in the NDMAs ‘‘were 

consistent’’ with these earlier 

agreements. Id. They refrain from 

offering an explanation for the 33% 

drop in the minimum penny rate from 

the earlier agreements to the NDMAs 

that could well be due to increased 

bargaining power of the major record 

companies compared to the earlier 

mastertone sellers (e.g., Opera Telecom), 

the maturing of the mastertone market, 

or a combination of these and other 

factors. Without some credible 

explanation for the differences between 

the two sets of agreements, we cannot 

agree with the Copyright Owners’ 

assessment that these rate structures are 

fully consistent. 

Copyright Owners concede that a 

‘‘relatively small number of songs 

account for the bulk of mastertone 

revenue,’’ but contend that the 

mastertone market mirrors the music 

industry as a whole, which, according to 

Copyright Owners, is ‘‘hit-driven.’’ 

Copyright Owners PFF at ¶ 513. Perhaps 

as a result of these contentions, 

Copyright Owners offer no adjustment 

to the proposed mastertone benchmark 

to align it to the market for CDs or 

downloads.25

While the proposed mastertone 

benchmark certainly offers valuable rate 

evidence from the marketplace 26 for 

one of the types of products covered by 

the Section 115 license that is the 

subject of this proceeding (i.e., 

ringtones), it is much less persuasive 

when that benchmark is applied to the 

other products at issue in this 

proceeding (i.e., CDs and permanent 

downloads) that are, at best, only in 

small part similar in nature and ultimate 

consumer use. For example, although 

CDs and permanent downloads may be 

easily perceived as substitutes by 

consumers, it is unlikely that consumers 

would regard a CD as a very good 

substitute for a mastertone or vice-versa. 

In short, we find that although 

substantial empirical evidence shows 

that sound recording rights are paid 

similar multiple times the amounts paid 

for musical works rights in most 

ringtone markets, that proposed 

benchmark evidence is far from 

dispositive of what the size of that 

multiple might be for other types of 

products such as CDs and permanent 

downloads.27 While similar sellers and 

sometimes even similar buyers might be 

participants in both the proposed 

benchmark ringtone market and the 

target CD and permanent download 

markets, the benchmark and target 

markets differ significantly in terms of 

the ultimate product consumed. 

b. Proposed Synch License Benchmark 

With respect to synch licenses, 

Copyright Owners represent that they 

typically receive one-half of the total 

licensing fees paid by licensees who 

wish to use a sound recording in an 

audiovisual work. Copyright Owners 

PFF at ¶ 531. To use a sound recording 

in an audiovisual work, such as a film, 

television show or commercial, a 

licensee must obtain a 

‘‘synchronization’’ (or ‘‘synch’’) license 

for the underlying musical composition 

as well as a ‘‘master use’’ license for the 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4519 

28See Pascucci WRT at 3–4 (‘‘[t]he purpose that 

music serves when it is licensed for use in movies, 

television shows and advertisements is 

fundamentally different from the purpose it serves 

when used in CDs, downloads and other audio 

formats * * * While music can serve important 

purposes in terms of dramatizing a story, setting a 

mood, creating positive associations with a product, 

or drawing people’s attention, the purpose of the 

music [in the synch market context] is secondary to 

that of the larger audio-visual work into which the 

music is incorporated—and it is that larger work 

that consumers pay to watch (in the case of a 

movie) or for which producers and advertisers pay 

with the hope that consumers will watch (in the 

case of a television show or advertisement).’’). 

29Although RIAA indicated in their final oral 

argument that their primary ‘‘benchmark’’ was the 

average effective royalty rate in the free market (see 

7/24/08 Tr. at 7864 (Smith, Closing Oral Argument 

for RIAA)), it is not clear that Dr. Wildman was 

affirmatively offering such a ‘‘benchmark.’’ First, 

Dr. Wildman testified only as a rebuttal witness 

and, in the context of criticizing Dr. Landes’ choice 

of benchmarks, presented evidence that he 

indicated cast doubt on the accuracy of Dr. Landes’ 

benchmarks. See Wildman WRT at 30. Second, in 

his rebuttal testimony, Dr. Wildman opined that for 

benchmarks to be useful, they must satisfy three 

specific criteria. Wildman WRT at 3. Dr. Wildman 

Continued 

sound recording, neither of which is 

subject to a compulsory license. 

Copyright Owners PFF at ¶ 532. Synch 

licenses and master use licenses 

typically contain ‘‘most favored nation’’ 

provisions, which state that if a licensee 

acquires one of the two necessary rights 

and subsequently agrees to pay the 

licensor of the other necessary right 

more than it paid the first, the licensee 

will be obligated to increase 

retroactively the fee paid to the first 

party. Copyright Owners PFF at ¶ 534. 

The presence of most favored nation 

provisions in typical synch license 

agreements may effectively dictate that 

the fees paid to music publishers for 

synch rights walk in lockstep with those 

paid to record companies for master use 

rights. See Copyright Owners PFF at 

¶ 535. Even assuming that the 

differences in the market for synch 

rights and that for CDs, downloads, and 

ringtones could be reconciled, it is 

difficult to see what useful information 

could be gleaned about the value of a 

compulsory license to make and 

distribute a phonorecord from the 

relative value of two licenses that a 

prospective licensee must obtain to use 

a particular recording in an audio-visual 

work where obtaining those licenses is 

predicated on the licensee paying each 

of the licensors an equal share of 

royalties. 

Copyright Owners represent that there 

are tens of thousands of synchronization 

transactions completed each year. Id. at 

¶ 533. They do not, however, proffer 

proposed factual findings relating to the 

percentage of songs recorded in a 

particular year that might be the subject 

of a synch license. Moreover, Copyright 

Owners do not proffer evidence that 

would allow the Judges to generalize 

about the relative bargaining power of 

licensees and licensors in the 

benchmark market as compared to the 

target market. 

At bottom, the consumer products 

from which demand is derived for 

music inputs are clearly not comparable 

in the proposed benchmark market and 

the target market.28 No benchmark 

adjustments are proffered to remedy this 

shortcoming. Therefore, we do not find 

the proposed synch license benchmark 

to be of any meaningful value. 

Potential benchmarks are confined to 

a zone of reasonableness that excludes 

clearly noncomparable marketplace 

situations. The musical works inputs in 

the synch market are used in very 

different ultimate consumer products by 

different input buyers as compared to 

the target market and the input sellers 

may have different degrees of market 

power in the benchmark market as 

compared to the target market. The mere 

fact a musical work is used as an input 

in both the proposed benchmark market 

and the target market is not sufficient to 

overcome all the aforementioned 

fundamental differences between the 

proposed benchmark market and the 

target market even in a purely relative 

value analysis. Because of the large 

degree of its incomparability, the synch 

market ‘‘benchmark’’ clearly lies outside 

the ‘‘zone of reasonableness’’ for 

consideration in this proceeding. 

Therefore, we find this particular 

benchmark cannot serve as a starting 

point for the 801(b) analysis that must 

be undertaken in this proceeding. 

c. The Audio Home Recording Act 

Dr. Landes also offered a third 

benchmark—the royalty structure from 

the Audio Home Recording Act 

(‘‘AHRA’’). 17 U.S.C. 1001–1010. Under 

the AHRA, royalties payable by 

manufacturers of digital recording 

devices are divided as follows: one-third 

for the ‘‘Musical Works Funds’’ and 

two-thirds for the ‘‘Sound Recording 

Fund.’’ Copyright Owners contend that 

this royalty allocation ‘‘provides 

corroboration of the relative value of the 

rights to musical compositions and 

sound recordings through the statute’s 

division of royalties from the sale of 

digital audio recorders.’’ Copyright 

Owners PFF at ¶ 490. According to 

Copyright Owners, the AHRA was 

‘‘spurred by concerns within the music 

industry that new digital recording 

devices would permit consumers to 

easily make high-quality digital copies 

of music, adversely affecting the market 

for audio recordings.’’ Copyright 

Owners PFF at ¶ 541. 

Dr. Landes concedes that the AHRA 

‘‘is not strictly the result of a voluntary 

exchange in a competitive market,’’ 

rather, ‘‘it reflects the outcome of a 

compromise among competing interest 

groups in the legislative context.’’ 

Copyright Owners PFF at ¶ 542. 

Nevertheless, Dr. Landes contends that 

the AHRA rate structure ‘‘provides 

evidence of the relative value of 

copyrighted songs and sound 

recordings.’’ Id. 

Although the AHRA refers to the 

payments required under the act as 

‘‘royalties,’’ they are, we conclude, in no 

material respect comparable to the 

payments prospective licensees of 

copyrighted musical works agree to pay 

to obtain a license to make and 

distribute those works. Rather, the 

AHRA payments are legislative 

assessments imposed on the 

manufacturers of digital audio recording 

devices and media to partially offset 

potential lost revenues that the 

copyright owners and record companies 

may suffer as a result of unlicensed 

copies of sound recordings facilitated by 

those recording devices and media. 

Congress determined that a certain 

percentage of those assessments should 

be allocated to musical works and a 

certain percentage to sound recordings. 

We cannot conclude on the record 

before us that Congress intended its 

allocation of AHRA assessments to 

reflect in any respect its view of the 

relative value of musical works vis-a ́-vis 

sound recordings. Nor can we conclude 

that such an assessment would 

reasonably reflect market conditions 

today for comparable products, which is 

the essence of a benchmark analysis. In 

the absence of such evidence, we do not 

find this proffered ‘‘benchmark’’ 

particularly relevant to the task at hand. 

2. RIAA and DiMA Proposed 

Benchmarks 

RIAA contends that a number of 

‘‘benchmarks’’ are most relevant to our 

determination, including: (1) Several 

types of ‘‘average effective mechanical 

royalty rates’’ as calculated by their 

economics expert Dr. Wildman; (2) 

certain mechanical rates applicable in 

other countries; and (3) an analysis of 

historical norms by their economic 

expert Dr. Teece. DiMA also argues, 

together with RIAA, that certain 

mechanical rates applicable in other 

countries provide a useful benchmark 

for the licenses at issue in this 

proceeding. 

a. Effective Mechanical Rate Data 

RIAA argues that the most appropriate 

‘‘benchmark’’,29 as proffered by their 

4520 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

then not only found Dr. Landes’ benchmarks 

wanting with respect to these three criteria (see, for 

example, Wildman WRT at 3–4), but also appeared 

to indicate that his own evidence failed to meet 

these three criteria (see 5/12/08 Tr. at 5881). 

Nevertheless, irrespective of whether they meet Dr. 

Wildman’s criteria for a benchmark, we find that 

Dr. Wildman’s various summaries of mechanical 

license data do provide some limited information 

relevant to our inquiry. Inasmuch as both RIAA as 

well as Copyright Owners refer to these data as 

‘‘benchmarks’’ in their arguments, we adopt their 

label as a convention in this determination. 

30Controlled composition clauses reduce the 

royalty rate that a copyright user is willing to pay 

a songwriter who is also a performer. A typical 

controlled composition clause would place a 

percentage cap on the amount of mechanical 

royalties that a record company would be willing 

to pay to a songwriter/performer (i.e., a cap of 75% 

of the statutory rate). A typical controlled 

composition clause might also reduce the amount 

of mechanical royalties that a record company 

would be willing to pay a songwriter/performer by 

limiting the number of album tracks upon which 

the company would be willing to pay mechanicals 

(e.g., a 10-track limit on mechanical royalties). 

31For SONY and WMG, the data was from the 

third quarter of 2006. For UMG, it was from the 

fourth quarter of 2007. 5/12/08 Tr. at 5844. 32Under this argument, made by Dr. Landes and 

others, recording companies have no incentive to 

pay above the compulsory royalty rate in a 

voluntary agreement because they can always pay 

the compulsory rate if they are willing to comply 

with the compulsory licensing process. See, for 

example, Landes WRT at 39. The evidence in the 

record suggests that most are not. See, for example, 

Tr. 2/14/08 at 3325–6 (A. Finkelstein). RIAA’s 

expert economist supplies another view of the 

compulsory license process compared to that 

offered by Dr. Landes. See Wildman WDT at 31 and 

n.39 (‘‘[a]s witnesses for both record companies and 

music publishers have explained, essentially no one 

uses the compulsory license process—licenses for 

mechanical royalties for sales of sound recordings 

are negotiated in the market on a voluntary basis. 

* * * The fact that they enter into voluntary 

agreements is not itself evidence that transaction 

costs [in such agreements] are low. It simply means 

that the transaction costs of voluntary agreements 

are lower than those associated with using the 

compulsory license. * * *’’). 

economics expert, Dr. Wildman, is 

derived by analyzing the overall average 

effective mechanical rate, compared to 

what would be paid if all mechanicals 

were paid at the statutory rate. Dr. 

Wildman further supplements this 

analysis by examining (1) what is paid 

for first uses of songs (as opposed to a 

subsequent use of a song that has 

previously been released), which are not 

subject to the compulsory license; and 

(2) the mechanical royalty rates paid for 

first uses to certain non-singer 

songwriters who agree to rates that are 

not part of some broader agreement like 

those containing controlled composition 

clauses for singer-songwriters.30

Wildman WRT at 5–6; 42–43. According 

to Dr. Wildman, an examination of all 

three data sets lead to the conclusion 

that the market rate for mechanicals on 

CDs and digital downloads is between 

5.25 cents and 7.8 cents per track, or 

about 7.25% to 10.08% of wholesale 

revenues. Id. at 6. 

Dr. Wildman based his analysis of 

potential benchmarks on mechanical 

royalty data he received from three 

major record companies: SONY BMG 

(‘‘SONY’’), Warner Music Group 

(‘‘WMG’’), and Universal Music Group 

(‘‘UMG’’). Id. at 35. As a preliminary 

matter, the data from the record 

companies was limited to mechanical 

royalties negotiated and paid on one 

quarter of one fiscal year’s releases, 

including data on which releases 

involved agreements by singersongwriters to receive reduced royalties, 

which releases involved co-writers who 

had agreed to write songs for reduced 

rates, and which individual tracks were 

first uses (and thus not subject to the 

compulsory license). Id. In short, the 

analysis was based on data from only 

three record companies and only for a 

single quarter. Indeed, the data from one 

of the record companies, UMG, was not 

even from the same quarter as that from 

the others.31 Moreover, Dr. Wildman 

conceded that the data he received from 

UMG had limited usefulness since UMG 

does not separately break out situations 

in which co-writers agreed to write 

songs at reduced rates because of similar 

restrictions that apply to their 

companion songwriter. Id. at 36. Dr. 

Wildman also limited his analysis to 

rates for physical rather than digital 

products. In sum, Dr. Wildman himself 

conceded that his data set was less than 

ideal. 5/12/08 Tr. at 5850–51 

(Wildman). 

Based on this limited data set, Dr. 

Wildman concluded that the average 

effective per track rates for mechanical 

royalties for physical products paid by 

the three record companies ranged from 

[REDACTED] for WMG to [REDACTED] 

for UMG. Wildman WRT at 37–38. 

However, there are substantial 

unexplained differences in the average 

effective rates he obtains from his 

analysis of the data both as between 

different companies (UMG mean 

[REDACTED] than WMG mean) and also 

as between results obtained from 

different data sources for the same 

companies (e.g. 7.42 cents mean for 

SONY from publisher data as compared 

to [REDACTED] for SONY from record 

company data). Even the direction of the 

latter difference is not consistent for the 

two companies for which Dr. Wildman 

presents publisher data. Wildman WRT 

at 37–39; 5/12/2006 Tr. at 5850–1 

(Wildman). Dr. Wildman acknowledges 

that the agreements he analyzed were 

negotiated in an environment where the 

statutory rate is 9.1 cents, which, 

Copyright Owners contend is a ceiling 

above which the record companies will 

not pay.32 Dr. Wildman also 

acknowledged the presence in the 

agreements of so-called ‘‘controlled 

composition clauses.’’ 

Dr. Wildman analyzed just that 

portion of the agreements that involved 

the first use of sound recordings, which 

are not subject to the compulsory 

mechanical royalty rate, but which may 

include controlled composition clauses. 

The average effective per track rates 

were [REDACTED] for SONY, 

[REDACTED] for WMG, and 

[REDACTED] for UMG. Wildman WRT 

at 42. In addition, Dr. Wildman further 

analyzed first use agreements involving 

ostensibly only ‘‘pure’’ songwriters (i.e., 

not singer-songwriters) or ‘‘co-writers 

who had agreed to controlled rates and 

all individuals not subject to a 

controlled composition clause at all.’’ 

Wildman WRT at 43. The per track 

average effective rate for this latter 

group was [REDACTED] for SONY and 

[REDACTED] for WMG. (UMG data did 

not permit such an analysis). Wildman 

WDT at 43–44. Yet, these two more 

limited (in scope of coverage) 

supplemental analyses do not serve to 

provide substantial corroboration for Dr. 

Wildman’s initial broader effective rate 

analysis. Looked at on a company-bycompany basis, each data base cut 

produces a substantially different result 

for the same company and a different 

rank order for the companies analyzed. 

These differences are not explained. 

Moreover, Dr. Wildman admits that his 

regression analysis of the first use data 

provides very little explanatory power 

for the variation in the effective rate 

obtained for WMG and UMG and, even 

in the best case, leaves over half the 

variation in the effective rate obtained 

for SONY unexplained. 5/12/2008 Tr. 

5853–4 (Wildman). 

Even viewed in the best light, Dr. 

Wildman’s overall effective rate analysis 

is simply no more than a ‘‘starting 

point’’ as he himself cautions. 5/12/08 

Tr. 5881 (Wildman). It makes no 

adjustment for the impact of controlled 

composition clauses that reflect tradeoffs between the various elements of an 

artist contract that may cover rights and 

forms of compensation well beyond the 

mechanical rights addressed by the 

clause. Copyright Owners PFF at 

¶¶ 686–7. As briefly noted hereinbefore, 

the effective rates derived by Dr. 

Wildman also suffer from empirical 

shortcomings. Therefore, we decline to 

assign the weight necessary to Dr. 

Wildman’s effective rate analysis to 

view it as a useful specific benchmark. 

However, given the absence of any more 

substantial or better evidence in the 

record of a lower rate, the Wildman 

overall effective rate data can help to 

identify the low-end limits for 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4521 

33See Adjustment of Royalty Payable Under 

Compulsory License for Making and Distributing 

Phonorecords; Rates and Adjustment of Rates, 

Copyright Royalty Tribunal Docket No. 80–2, 46 FR 

10466 (Feb. 3, 1981). 

34For example, Dr. Teece explained that the 

record industry now confronts significant and 

sustained business challenges, such as the spread 

of piracy and the advent of new digital distribution 

challenges that were not present when the CRT 

raised the mechanical royalty rates in the 1981 

proceeding. Dr. Teece contends that almost every 

financial indicator of the record companies’ 

financial position has worsened from that described 

by the CRT in its 1981 decision. Teece WDT at 79– 

80. However, Dr. Teece failed to adequately 

consider whether financial measures such as 

revenue generation were of greater or lesser 

significance than company profitability as the 

industry’s structure has changed. Similarly, Dr. 

Teece fails to adequately inquire as to whether any 

impact of changed industry circumstances or 

changed profitability has greater or lesser 

significance for that substantial portion of the 

industry where record companies and publishers 

are units of the same parent company as compared 

to standalone record companies and publishers. 

35 DiMA and RIAA contend that there are a 

number of similarities between the recorded music 

industries and markets in the two countries (e.g., 

both have ‘‘extremely significant record markets;’’ 

invest heavily in A&R (artist and repertoire), 

marketing and promotion, and in developing an 

online music market while battling piracy; and are 

international in focus). DiMA PFF at ¶¶ 316–318, 

RIAA PFF at ¶¶ 705–715. 

36For example, DiMA states that the U.K. 

settlements resolved licensing rate disputes among 

the British Phonographic Industry Limited (a record 

company trade association whose members include 

the major record labels), the Mechanical-Copyright 

Protection Society Limited (which distributes 

royalties to the owners of mechanical rights), and 

digital distributors such as iTunes, Napster and 

MusicNet. Id. at ¶ 319. 

reasonable rates in this proceeding. 

Therefore, we conclude that the 

effective rate data submitted by Dr. 

Wildman show only that a reasonable 

rate for the mechanical license for CDs 

and permanent downloads could not be 

lower than the range indicated by his 

broadest effective rate data set (i.e., 5.88 

cents to 7.68 cents per song). 

Dr. Wildman does not offer an 

independent benchmark that would 

apply specifically to ringtones. Rather, 

he proffers an adjustment to Dr. Landes’ 

mastertone benchmark that Dr. 

Wildman contends would yield a 

reasonable rate for ringtones of between 

14.5% to 20% of the wholesale price of 

ringtones. See Wildman WRT at 53. 

Although he does not elaborate, the 

upper end of the 14.5% to 20% of 

wholesale range would yield a penny 

rate of 25 cents based on his assumed 

wholesale price of $1.25. The lower 

boundary of his estimate is based on a 

‘‘surplus’’ analysis that assumes a 

sharing of ‘‘surplus’’ revenues in the 

same proportion as would occur in the 

CD and permanent download market— 

assuming that the results of his 

previously discussed effective rate 

analysis were deemed to be accurate. 

However, given the shortcomings of his 

effective rate analysis and his own 

strong cautions against assuming that 

the mastertone market is comparable to 

the CD and permanent download market 

absent numerous other quantifiable 

adjustments (see Wildman WRT at 46), 

this attempt at bootstrapping falls flat. 

In addition, there are serious questions 

concerning the adequacy of Dr. 

Wildman’s assumptions concerning his 

treatment of costs. Copyright Owners 

RFF at ¶¶ 422–5. In short, questionable 

assumptions coupled with concerns 

over the reliability of the data used in 

the Wildman effective rate analysis 

cause us to regard the findings of Dr. 

Wildman’s ‘‘surplus’’ analysis as 

carrying little, if any, weight. 

b. 1981 CRT Decision and Historical 

Norms 

RIAA also invites the Judges to 

consider in setting a rate the approach 

taken by the Copyright Royalty Tribunal 

(‘‘CRT’’) in the 1981 section 115 

determination, as characterized by 

RIAA’s expert economist, Dr. David 

Teece.33 According to Dr. Teece, the 

best place to begin the rate analysis 

should be to use the 1981 CRT decision 

‘‘as a starting point and [adjust it] for 

changes in the industry over the interim 

period.’’ Teece WDT at 76. In other 

words, Dr. Teece recommends that the 

1981 rate, adjusted to reflect its relative 

value in terms of today’s average retail 

CD prices, should be adopted by the 

Judges as a benchmark and then further 

adjusted downward by an unspecified 

amount in order to reflect a 

consideration of changed 

circumstances 34 over the past 25 years 

in the 801(b) factors. In the alternative, 

Dr. Teece suggests adjusting the 1997 

industry settlement rate by the percent 

change in the wholesale CD price since 

1998. 

Dr. Teece contends that following the 

1981 CRT decision would produce a 

rate today of 7.8% of wholesale, which 

should then be adjusted downward to 

bring it into accordance with the section 

801(b) factors. Teece WDT at 81. In the 

alternative, adjusting forward from the 

initial 1997 industry settlement rate 

would produce a rate today of 7.6% of 

wholesale. Teece WDT at 113. 

We do not find that either the 1981 

CRT rate or the basis of the 1997 

industry settlement is useful as a 

benchmark. Both the 1981 CRT decision 

and the 1997 settlement reflect a view 

of the product market that has changed 

substantially relative to the types of 

products and the modes of product 

distribution modes available today. 

Moreover, both the 1981 CRT rate as 

well as the 1997 industry settlement 

explicitly or implicitly incorporated the 

equivalent of some or all the 801(b) 

factor analysis. Although the Judges 

acknowledge that the financial 

condition of the industry, including the 

potential impact of piracy, can properly 

play a role in considering whether an 

adjustment is necessary to a particular 

benchmark, such considerations, in and 

of themselves, do not form the basis of 

a useful benchmark. Therefore, we find 

that neither of Dr. Teece’s proffered 

‘‘benchmarks’’ provide sufficient 

comparability to offer a useful yardstick 

by which to gauge prices in today’s 

markets, and we defer further 

discussion of the condition of the 

industry until our consideration of the 

section 801(b) factors below. 

c. Foreign Mechanical Rates 

DiMA contends that the most useful 

benchmark in the record is the license 

agreement reached in the United 

Kingdom for 8% of retail revenue plus 

applicable minima, which includes the 

reproduction, distribution and public 

performance of musical works by digital 

music services. This benchmark, 

according to DiMA, represents an 

‘‘upper bound estimate for a reasonable 

rate in this proceeding.’’ DiMA PCL 

¶ 77. This benchmark was proffered by 

DiMA economics expert Ms. GuerinCalvert. In addition to also proffering 

the U.K. mechanical rates as a 

benchmark, RIAA suggests that both 

Japanese and Canadian rates are also 

relevant, although the bulk of the 

evidence presented by RIAA also related 

to the U.K. mechanical rates. RIAA, 

while agreeing with the 8% of retail 

price cited by DiMA, notes that the rate 

is set at 8% of retail price less 17.5% 

Value Added Tax (‘‘VAT’’). RIAA PFF at 

¶¶ 729, 731. The RIAA presents further 

adjustments to arrive at a wholesale 

price equivalent of 7.7% (see RIAA PFF 

at ¶ 740), which may rise to as much as 

11.1% of wholesale (or approximately 

8.0 cents) depending on the amount of 

discounting from the Published Price to 

Dealer (‘‘PPD’’) assumed for the U.K. in 

order to translate the U.K. rate to an 

actual wholesale price received by 

record companies in the U.S. (see RIAA 

RFF at ¶ 123). 

DiMA and RIAA contend that the 

rates adopted in the U.K. settlements 

should serve as a useful benchmark 

because they claim those rates involve 

comparable markets,35 comparable 

parties 36 and a comparable basket of 

rights (i.e., mechanical rights for 

permanent downloads). See, for 

4522 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

37To underscore this difficulty in making a 

comparison of rates across countries, one only need 

examine the difficulty RIAA’s witness has in 

explaining the tax structure in the U.K. 2/12/08 Tr. 

2771–2 (Taylor): 

CHIEF JUDGE SLEDGE: I hate to interrupt. On 

page 12, before you leave that chart, the rates 

exclude the value added tax. What is the amount 

of that? 

THE WITNESS: That is 171⁄2 percent, Your 

Honor, in the U.K. 

BY MR. SMITH: Q. Now, on— 

CHIEF JUDGE SLEDGE: And—171⁄2 percent of 

what? 

THE WITNESS: It’s charged—I’m not a tax expert, 

Your Honor, but it’s actually more complicated than 

being charged on the retail price. I think you have 

to do some complicated calculation of 117.5 percent 

of something. I’m sorry. I can’t explain it very well, 

but essentially it’s 171⁄2 percent of the retail price, 

but it’s calculated not by taking 171⁄2 percent of the 

retail price and adding it. It’s slightly more 

complicated than that. 

38This wholesale price is consistent with Mr. 

Benson’s testimony concerning a wholesale price 

for ringtones in 2006 of $1.21. Benson WRT at 22. 

example, DiMA PFF at ¶¶ 316–320 and 

RIAA PFF at ¶¶ 316–320. 

In reply, Copyright Owners object to 

the comparability of the foreign rates on, 

among other grounds, that: (1) The 

percentages presented are not applied 

consistently to the same revenue base 

(Copyright Owners RFF at ¶¶ 597–601); 

and (2) the various foreign percentage 

rates may translate into higher actual 

revenue for copyright owners than they 

currently receive in the U.S. because of 

exchange rate differences (Copyright 

Owners RFF at ¶¶ 601–3). The 

Copyright Owners’ objections related to 

revenue base calculation may not fully 

capture the range of problems 

surrounding this issue. For example, the 

revenue base for the foreign rates is also 

subject to differing tax structures in the 

U.S. as compared to the U.K., adding to 

the difficulties of translating the U.K. 

benchmark into a U.S. equivalent 

benchmark.37

While the Copyright Owners’ 

objections to the foreign rate benchmark 

noted hereinabove have merit, they 

serve to underline the greater concern 

that comparability is a much more 

complex undertaking in an international 

setting than in a domestic one. There are 

a myriad of potential structural and 

regulatory differences whose impact has 

to be addressed in order to produce a 

meaningful comparison. For example, 

the fact that the record industry in the 

U.K. does not employ controlled 

composition clauses needs to be 

carefully weighed in seeking to extend 

the proposed benchmark to physical 

product subject to such clauses in this 

country. Copyright Owners PFF at 

¶ 713. Similarly, even if the foreign 

benchmark were purely a product of a 

negotiated settlement between similar 

types of parties, it is hard to imagine 

that such parties would structure their 

settlement to encompass not only the 

U.K. copyright regime and U.K. industry 

considerations but to simultaneously 

encompass the U.S. copyright regime 

and U.S. industry considerations. To the 

extent such parties fail to do so and 

differences exist, a comparison between 

such foreign rates becomes less 

probative for benchmark purposes. We 

find, that on the record before us, the 

full range of comparability issues has 

not been sufficiently analyzed and 

presented to permit us to use the foreign 

rates presented as a benchmark for the 

target U.S. markets in question in this 

proceeding. 

3. Conclusions With Respect to 

Benchmarks 

Based on the evidence before us, we 

conclude that no single benchmark 

offered in evidence is wholly 

satisfactory with respect to all of the 

products for which we must set rates. 

As previously noted, the proposed 

mastertone benchmark certainly offers 

valuable rate evidence from the 

marketplace for one of the types of 

products covered by the section 115 

license that is the subject of this 

proceeding (i.e., ringtones). The 

mastertone benchmark yields a rate of 

20% of wholesale which if applied to 

the $1.20 wholesale price of a ringtone 

suggested by RIAA in their penny rate 

proposal (see RIAA Second Amended 

Rate Proposal, July 2, 2008, at 1–6),38

produces a penny-rate equivalent of 24 

cents. However, the mastertone 

benchmark carries little weight when it 

is applied to the other products at issue 

in this proceeding (i.e., CDs and 

permanent downloads) that are, at best, 

only in small part similar in nature and 

ultimate consumer use. 

Also as noted hereinbefore, because 

the effective rates derived by Dr. 

Wildman suffer from analytical and 

empirical shortcomings, we decline to 

employ the results of his analysis as a 

specific benchmark for CDs and 

permanent downloads. Rather, we 

conclude that the effective rate data 

submitted by Dr. Wildman show only 

that a reasonable rate for the mechanical 

license for CDs and permanent 

downloads could not be lower than the 

range indicated by his overall effective 

rate data set, or 5.88 cents to 7.68 cents 

per song or track. Moreover, since this 

proffered benchmark was based only on 

physical product data and was offered 

only as a benchmark for CDs and 

permanent downloads, we decline to 

assign little, if any, weight to the 

Wildman effective rate data set in 

determining the rate for such a different 

product as ringtones. 

In sum, the usable evidence with 

respect to rate comparables offered by 

the parties supports the determination 

of the parameters of a zone of 

reasonableness. Based on the record of 

evidence in this proceeding, we have 

determined that the 20% rate (or 24 cent 

penny-rate equivalent) identified 

hereinabove marks the upper boundary 

for a zone of reasonableness for 

potential marketplace benchmarks. We 

have also determined that potential 

marketplace benchmarks cannot be less 

than somewhere between 5.88 cents and 

7.68 cents. However, neither of these 

two pieces of evidence offers a specific 

benchmark for all the products at issue 

in this proceeding in terms of 

comparability. Rather we find that the 

upper boundary serves as a good 

benchmark for ringtones, but only 

carries small weight as a benchmark for 

CDs and permanent downloads. On the 

other hand, with respect to CDs and 

permanent downloads, some rate closer 

to the lower boundary carries more 

weight than one closer to the upper 

boundary in terms of comparability, but, 

given the previously noted analytical 

and empirical shortcomings of Dr. 

Wildman’s effective rate analysis, we 

are not persuaded that the existing 9.1 

cent rate for such products, now in 

effect for nearly three years, is too high 

or inappropriate. We now turn to the 

801(b) policy considerations to 

determine the extent to which those 

policy considerations weigh in the same 

direction or a different direction as the 

benchmark evidence hereinbefore 

reviewed. 

4. The Section 801(b) Factors 

Section 801(b)(1) of the Copyright Act 

states, among other things, that the rates 

that the Judges establish under section 

115 shall be calculated to achieve the 

following objectives: (A) To maximize 

the availability of creative works to the 

public; (B) to afford the copyright owner 

a fair return for his or her creative work 

and the copyright user a fair income 

under existing economic conditions; 

(C) to reflect the relative roles of the 

copyright owner and the copyright user 

in the product made available to the 

public with respect to relative creative 

contribution, technological 

contribution, capital investment, cost, 

risk, and contribution to the opening of 

markets for creative expression and 

media for their communication; and 

(D) to minimize any disruptive impact 

on the structure of the industries 

involved and on generally prevailing 

industry practice. 17 U.S.C. 801(b)(1). In 

the SDARS proceeding, we stated that 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4523 

39The current rate for physical products and 

permanent downloads is 9.1 cents per track or 1.75 

cents per minute of playing time or fraction thereof. 

This rate, reached in a settlement between RIAA, 

NMPA and SGA, and adopted by the Librarian, has 

been in effect since January 1, 2006. 

40We employ the term ‘‘nominal’’ only to connote 

that the rate in question is stated in current dollars. 

41For example, the record companies may well be 

able to make reductions in overhead costs which 

remain substantial despite restructuring efforts. See 

Copyright Owners RFF at ¶¶ 131–3. 

42 Dr. Landes also points out that setting a low 

rate simply to favor one mode of distribution may 

lead to market distortions of a type that may not be 

justifiable economically. Landes WRT at 18. 

‘‘the issue at hand [in analyzing the 

section 801(b) factors] is whether these 

policy objectives weigh in favor of 

divergence from the results indicated by 

the benchmark marketplace evidence.’’ 

See 73 FR at 4094. In the current 

proceeding, we have found that only 

one applicable benchmark, the 

mastertone benchmark proffered by Dr. 

Landes, serves as a relevant reference 

point for determining a mechanical 

royalty rate, but only for ringtones. For 

CDs and permanent downloads, we find 

that the proffered benchmarks lead only 

to the conclusion that the existing 

statutory rate 39 is neither too high nor 

too low or otherwise inappropriate. Our 

analysis of the Section 801(b) objectives, 

discussed below, leads us to further 

conclude that the available evidence 

submitted by the parties related to these 

policy objectives does not reasonably 

weigh in favor of any further 

adjustments beyond establishing a 24 

cent statutory rate for ringtones and the 

maintenance of the existing previously 

negotiated 9.1 cent rate for CDs and 

permanent downloads without any addon to account for general inflation 

during the license period. 

a. Maximize Availability of Creative 

Works 

The various arguments of the parties 

ultimately reduce to a question of 

whether their respective incentives with 

respect to this policy objective will be 

adversely impacted by the rates adopted 

in this proceeding. 

Copyright Owners’ argument with 

respect to this objective is that 

songwriters and music publishers rely 

on mechanical royalties and both have 

suffered from the decline in mechanical 

income. See Copyright Owners PFF at 

¶ 343. Under the current rate, they 

contend, songwriters have difficulty 

supporting themselves and their 

families. As one songwriter witness 

explained, ‘‘The vast majority of 

professional songwriters live a perilous 

existence.’’ Carnes WDT at 3. We 

acknowledge that the songwriting 

occupation is financially tenuous for 

many songwriters. However, the reasons 

for this are many and include the 

inability of a songwriter to continue to 

generate revenue-producing songs, 

competing obligations both professional 

and personal, the current structure of 

the music industry, and piracy. The 

mechanical rates alone neither can nor 

should seek to address all of these 

issues. We find no persuasive evidence 

in the record to support the notion that 

the current mechanical royalty rates are 

leading to a shortage of musical 

compositions. Furthermore, while we 

acknowledge that the mechanical 

royalty rate is an important source of 

income for songwriters, we find no 

persuasive evidence in the record that 

an undiminished nominal 40 mechanical 

rate will fail to ensure adequate 

incentives for songwriters and 

publishers over the course of the license 

period in question. 

RIAA for its part contends that this 

policy objective is only satisfied to the 

extent that the mechanical rate levels 

provide sufficient incentives for record 

companies to make sound recordings 

out of the musical works provided by 

the songwriters because, they contend, 

it is only through these sound 

recordings that the musical works reach 

the consuming public. See, for example, 

RIAA PCL at ¶ 69. RIAA argues that in 

light of declining industry revenues 

from the sale of physical products, the 

mechanical royalty rate must be lowered 

so as to provide record companies with 

sufficient cost reductions and, thereby, 

sufficient incentives to continue to 

make sound recordings available to the 

same degree. See, for example, RIAA 

RFF at ¶ 349. However, Copyright 

Owners respond that: (1) Record 

company declining album sales in 

recent years have not been shown to be 

the result of the current mechanical rate 

and, indeed, Dr. Teece, RIAA’s own 

economic expert, attributes the decline 

to a ‘‘whole set of demand-related 

phenomena’’ rather than only the size of 

mechanical royalties; and (2) 

notwithstanding this recent decline in 

physical product revenues, other 

product lines have grown and the record 

companies continue to enjoy 

profitability. See Copyright Owners RFF 

at ¶¶ 85–86 and 147. While the 

recording industry’s physical product 

revenues have declined in recent years, 

the reasons for this decline are many 

and include, but are not limited to, 

various management and business 

planning decisions made by individual 

record companies, shifts in the modes of 

music distribution, and piracy. We find 

no persuasive evidence in the record to 

support the notion that the current 

mechanical royalty rates are 

substantially responsible for, let alone 

are the direct and sole reason for, any 

espoused contraction in the overall 

number of sound recordings reaching 

the public. Similarly, there is no 

persuasive case made in the record that 

reducing the nominal mechanical rate 

will positively impact sound recording 

production and distribution. Nor does 

the record before us even persuasively 

indicate that a reduction in this one 

specific nominal royalty rate is the only 

cost cutting solution available.41 In 

other words, we find that the record of 

evidence does not support the notion 

that an undiminished nominal 

mechanical rate will reduce record 

company incentives over the course of 

the license period in question. 

At the same time, in an environment 

where overall industry revenues are 

declining, any increase in the nominal 

mechanical rates to reflect general 

inflation should be reasonably justified. 

Because the Copyright Owners’ general 

inflation adjustment is neither specific 

as to timing or frequency (see 7/24/08 

Tr. at 7791–2, Cohen Closing Argument 

for Copyright Owners) nor supported by 

any persuasive rationale justifying such 

an adjustment (RIAA RFF at ¶¶ 479–81; 

see also DiMA PFF at ¶¶ 259–60), we 

find no reason to increase these nominal 

rates to reflect changes in the general 

level of inflation. 

DiMA contends that this policy 

objective is best satisfied by lowering 

mechanical royalty rates to encourage 

companies, such as DiMA members, 

that make musical works available to 

the public through digital distribution. 

DiMA PCL at ¶ 34. But DiMA’s focus is 

a narrow one which excludes 

consideration of the impact of its 

proposals on the overall supply of 

sound recordings through both physical 

and electronic distribution modes. It 

fails to adequately consider and 

measure the substitution effects of 

changes in the price of only one mode 

of distribution. Therefore, we are not 

persuaded that lowering the nominal 

cost for a single input used in a single 

mode of distribution will call forth even 

greater overall growth in the production 

and distribution of sound recordings.42

Moreover, even with respect to the 

limited scope of its concerns, DiMA 

offers no specific empirical evidence 

such as demand elasticities or 

persuasive consumer surveys to support 

the cause-and-effect results which it 

postulates. While we agree that digital 

distribution of musical recordings, such 

as that provided through DiMA 

members like Apple’s iTunes, provides 

an important avenue for enhancing the 

4524 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

43See, for example, 2/14/2008 Tr. 3325–6 (A. 

Finkelstein). 

44Copyright Owners maintain that ‘‘the 

songwriter is the provider of an essential input to 

the phonorecord: The song itself.’’ Copyright 

Owners PCL at ¶ 91, quoting the 1981 CRT decision, 

46 FR at 10480. Copyright Owners further contend 

that ‘‘the overwhelming weight of the evidence 

established that music publishers—both majors and 

independents—are responsible for discovering and 

developing songwriters and then assisting them in 

sharing their creativity with the public. This 

requires significant financial investments and 

involves substantial risk. Publishers provide 

advances to songwriters, which typically constitute 

a large percentage of the publishers’ yearly 

expenses. In addition, the success rate of 

songwriters is very low. Thus, the recoupment rates 

of publishers are low, and yearly write-offs are 

high.’’ Copyright Owners PCL at ¶ 94. 

public’s access to creative works, we 

find no persuasive evidence in the 

record that simply lowering the 

mechanical rates, as DiMA has 

proposed, will necessarily increase the 

public’s access to those creative works. 

Indeed, as noted hereinbefore, digital 

distribution has grown considerably 

while the current mechanical rates have 

been in place. 

We find that the current nominal 

statutory mechanical rates for physical 

products and permanent downloads as 

well as the current market nominal rates 

for ringtones as reflected by the Landes 

benchmark, on balance, will address 

each of the issues stressed by the parties 

and should help to maximize the 

availability of creative works to the 

public. In other words, the policy goal 

of maximizing the availability of 

creative works to the public is 

reasonably reflected in these current 

nominal rates and, therefore, no further 

adjustment is warranted. 

b. Afford Fair Return/Fair Income Under 

Existing Market Conditions 

With respect to this policy objective, 

Copyright Owners contend that 

‘‘[w]hereas the record companies can 

ensure themselves a fair return through 

their pricing policies, a songwriter has 

no such option, because the right of 

songwriters and music publishers to 

earn a fair return depends upon the 

availability of a sufficient statutory rate 

of return.’’ Copyright Owners PCL at 

¶ 81, citation omitted. 

Copyright Owners further contend 

that: 

[S]ubstantial evidence adduced at trial 

shows that record company profitability has 

been increasing due to streamlining of the 

physical business and improved margins on 

digital sales, which have relieved the record 

companies of substantial manufacturing, 

distribution, and returns expense. Record 

companies have also identified, and have 

begun to exploit, other new revenue streams 

through ‘‘360 contracts,’’ synchronization 

deals and performing rights royalty 

collections. The economics of digital 

distribution should lead to even greater 

profitability as the share of digital sales 

continues to grow. 

Copyright Owners PCL at ¶ 89. 

Copyright Owners also contend that 

‘‘[t]he record shows that iTunes, the 

dominant seller of permanent 

downloads, is profitable and would 

continue to be profitable if the 15 cent 

permanent download rate [proposed by 

the Copyright Owners] were adopted, 

whether or not Apple absorbs the cost.’’ 

Id. Copyright Owners further assert that 

‘‘[t]he evidence also shows that there 

has been substantial new entry into the 

permanent download business and 

DiMA has not established that new 

entrants would be precluded from 

entering the business, and thriving in it, 

by the Copyright Owners’ proposed 

rate.’’ Id. 

For its part, RIAA contends that, in 

analyzing this policy objective, the 

Judges must consider existing economic 

conditions, which, RIAA asserts ‘‘means 

a period in which record companies 

have faced and continue to face 

enormous challenges, in which 

consumers are willing to pay less and 

less for CDs, the prices of digital 

downloads are stagnant or softening and 

the prices of ringtones are falling, and 

in which publishers are making healthy 

profits far beyond a reasonable riskadjusted return on capital.’’ RIAA PCL 

at ¶ 80. On this latter point, RIAA 

further contends that ‘‘The result of the 

current system is that music publishers 

generate bloated profit margins and 

record companies and songwriters each 

bear the brunt.’’ RIAA PCL at ¶ 96. 

DiMA proposes that, in analyzing this 

policy objective, we also consider the 

impact of piracy on the music industry 

and the role that digital music services 

play as ‘‘the most important bulwark 

against piracy.’’ DiMA PCL at ¶ 41. 

In addressing this policy objective, we 

have analyzed the myriad of forces that 

are currently at play in the music 

industry. These include, as discussed 

above, falling sales of CDs and the 

commensurate impact that such 

decreases have had on record 

companies as well as on the copyright 

owners. We have also considered the 

rising importance to record companies 

and copyright owners of revenues from 

downloads and from mastertones. Then 

too, we have examined the record 

evidence regarding the role that piracy 

has played in the industry. In this latter 

context, we have analyzed the available 

evidence on the costs that record labels 

and publishers have incurred in battling 

piracy, whether through legal action or 

through changes in business models. We 

have also examined the role that new 

services, such as iTunes, may have 

played in channeling consumers toward 

legal sources of sound recordings. In 

addition, in determining reasonable 

mechanical rates, we considered 

evidence that there is little if any actual 

current use of the section 115 statutory 

license even when an identical rate is 

agreed upon by users and owners.43

Then too, we have considered that a 

significant portion of the mechanical 

royalties that songwriters earn, in those 

instances where the songwriter is not 

also the publisher, ultimately is paid to 

music publishers, including some that 

are affiliated with the record companies 

themselves. We also considered the 

relative contribution that music 

publishers make to the process. 

Viewing the totality of the evidence 

on this policy objective, we find that 

Copyright Owners have not provided 

sufficient evidence to establish that 

songwriters or publishers, under 

existing market conditions, will fail to 

receive a fair return for the artists’ 

creative works as a result of the 

adoption of a 24 cent statutory rate for 

ringtones based on marketplace 

evidence and the maintenance of the 

existing statutory 9.1 cent rate for CDs 

and permanent downloads. Nor do we 

find that RIAA or DiMA have provided 

sufficient evidence that would establish 

that their income, under existing 

economic conditions, would be unfairly 

constrained by adopting these rates. In 

short, we do not find that the evidence 

in the record supports any further 

adjustment to these in order to achieve 

this policy objective. 

c. Reflect Relative Roles of Copyright 

Owner and Copyright Users 

This policy objective requires that the 

rates we adopt reflect the relative roles 

of the copyright owner and the 

copyright user in the product made 

available to the public with respect to 

relative creative contribution, 

technological contribution, capital 

investment, cost, risk, and contribution 

to the opening of markets for creative 

expression and media for their 

communication. In this connection, the 

Copyright Owners emphasize the 

songwriters’ efforts in writing the 

creative work, the publishers’ efforts in 

supporting the songwriters, both 

financially through advances, and 

professionally by introducing them to 

co-writers.44 Not surprisingly, RIAA 

emphasized the record companies’ 

efforts in identifying promising artists, 

financing sound recordings, promoting 

and distributing the songwriters’ 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4525 

45RIAA also asks that we consider that ‘‘[t]he 

record companies’ business model is changing 

radically and they are facing declining sales and 

revenues, while at the same time the music 

publishers are facing much less difficult economic 

times.’’ Id. at ¶ 101. RIAA also asserts that ‘‘the 

impact of investment by record companies on other 

revenue streams of the music publishers is highly 

relevant to the risks that each party faces. Where, 

as here, expenditures of the record companies on 

the creation, marketing, and distribution of sound 

recordings actually facilitate and promote other 

revenue streams of the music publishers (such as 

synchronization and performance revenues), that 

promotion reduces the risk faced by songwriters 

and music publishers.’’ Id. at ¶ 103. Finally, RIAA 

contends that ‘‘record companies make all of the 

investments to create sound recordings, market and 

distribute them, and are essentially the sole (and 

certainly the primary) outlet for musical works.’’ Id. 

at ¶ 104. 

46According to DiMA, ‘‘[d]igital music 

distributors play a most important role relative to 

‘technological contribution, capital investment, 

cost, risk, and contribution to the opening of new 

markets for creative expression and media for their 

communications.’ ’’ DiMA PCL at ¶ 52. They do 

this, DiMA contends, by offering ‘‘millions of songs 

in comprehensive catalogs through simple-to-use 

and elegant Web sites that allow for easy browsing, 

as well as powerful search and cataloging 

tools * * * [and] compelling editorial content.’’ Id. 

at ¶ 53. In addition, they contribute through servers 

that provide ‘‘massive storage capabilities, 

bandwidth, and transmission facilities * * *.’’ Id. 

at ¶ 54. In short, DiMA asserts that the Judges 

should consider the fact that ‘‘DiMA member 

companies have developed an entirely new 

industry and educated consumers about entirely 

new ways to pay for music [as an alternative to 

piracy].’’ Id. at ¶ 58. 

creative works.45 Finally, DiMA 

emphasized the contribution digital 

distribution companies make, both 

through technological innovation, and 

through capital expenditure in 

developing and nurturing new avenues 

for the commercial exploitation of the 

artists’ works.46

Upon a careful weighing of the 

evidence submitted by the parties, we 

find that the current market indicated 

rate for ringtones and the current 

statutory rate for physical product and 

permanent downloads require no 

further adjustment arising from a 

consideration of this policy factor. 

Stripped of the considerable hyperbole 

attached to the evidentiary 

interpretations offered by the parties’ 

advocates, no persuasive evidence of 

substantial change in the balance of the 

contributions made by the parties 

appears to necessitate against the 

unadjusted continuation of these 

previously negotiated nominal rates 

over the course of the license period. 

d. Minimize Disruptive Impact 

In the SDARS proceeding, we noted 

that a new mechanical royalty rate may 

be considered to be disruptive ‘‘if it 

directly produces an adverse impact 

that is substantial, immediate and 

irreversible in the short-run because 

there is insufficient time for [the parties 

impacted by the rate] to adequately 

adapt to the changed circumstances 

produced by the rate change and, as a 

consequence, such adverse impacts 

threaten the viability of the music 

delivery service currently offered to 

consumers under this license.’’ 73 FR at 

4097. The same analysis applies in this 

proceeding as well. 

RIAA argues that the current statutory 

rate is already disruptive and, as a 

consequence, any increase such as that 

proposed by Copyright Owners must 

also be disruptive. See RIAA PFF at 

¶¶ 1441–52. Copyright Owners respond 

that an increase in the mechanical rates, 

as they have proposed, would not have 

a disruptive impact on record 

companies because their aggregate 

profitability is on the rise and 

mechanicals constitute only a small 

fraction of their overall expense. 

Copyright Owners PCL at ¶ 98. 

Moreover, Copyright Owners argue that, 

with respect to DiMA companies, the 

digital market is growing rapidly. They 

point to the success of iTunes as 

evidence that DiMA members ‘‘can 

easily absorb the increases in the penny 

rate’’ that they seek. Id. at ¶ 100. DiMA, 

in turn, argues that the Judges should at 

a minimum avoid rates and rate 

structures that would adversely affect 

digital music distributors’ ability to 

attain a sufficient subscriber base or 

generate sufficient revenue to reach 

certain financial targets. DiMA PCL at 

¶ 63. DiMA contends that the rates 

proposed by Copyright Owners ‘‘would 

halt innovation in its tracks. Even if [the 

Copyright Owners’ proposed rates] did 

not stop digital distribution entirely, 

[they] would stifle further entry [into 

the market].’’ Id. 

Because the rates we have identified 

as reasonable are currently in place (as 

marketplace rates in the case of 

ringtones and as the statutory rate in the 

case of CDs and permanent downloads), 

the various arguments concerning the 

consequences of a rise in the applicable 

rates is inapposite. Furthermore, we 

find that the RIAA’s contentions with 

respect to the disruptive impact of the 

current rates have little merit. RIAA’s 

list of horribles allegedly attributable to 

the current mechanical rates is not 

supported by any substantial evidence 

of cause-and-effect. Even the RIAA 

admits that ‘‘high mechanical royalty 

rates did not cause all of these 

problems.’’ Compare RIAA PFF at 

¶ 1441 listing record industry 

disruptions with RIAA PFF at ¶ 1442. 

Further, the RIAA’s proffered evidence 

fails to persuade us that reducing this 

one particular cost will alleviate all the 

claimed record industry adversity in 

any substantial way and fails to 

adequately weigh other cost-based or 

demand-based alternative explanations 

for the alleged adversity. Similarly, 

DiMA’s claims related to lowering the 

bar for new market entrants are not 

adequately supported by evidence to 

indicate the degree to which the overall 

cost structure and pricing capabilities of 

such new entrants differ from existing 

market participants such as Apple 

iTunes. Thus, we find that RIAA and 

DiMA have failed to show that the 

current mechanical rates have caused 

and are anticipated to continue to cause 

an adverse impact that is substantial, 

immediate and irreversible in the shortrun because there is insufficient time for 

the parties impacted by the rate to 

adequately adapt to the changed 

circumstances produced by the rate 

change and, as a consequence, such 

adverse impacts threaten the viability of 

the music currently offered to 

consumers under this license. SDARS, 

73 FR at 4097. 

On the other hand, Copyright Owners 

contend that the ‘‘draconian’’ cut in 

royalties that RIAA and DiMA seek 

would cause disruption to the Copyright 

Owners. They contend that such a cut 

would have a disproportionate impact 

upon songwriters but also argue that a 

rate cut would ‘‘materially impact the 

ability of music publishers to play the 

vital role in the creation of music that 

songwriters depend upon to exercise 

their creative craft.’’ Id. at ¶ 101. Again, 

inasmuch as the rates we have 

identified as reasonable are currently in 

place, these arguments concerning the 

consequences of a substantial cut in the 

applicable rates are inapposite. 

Furthermore, in analyzing the potential 

disruptive impact the rates we have 

adopted may have on the market we 

examined not only the rates but also the 

rate structure and have found that 

continuing the penny-rate structure 

rather than fostering disruption in the 

industry will likely minimize such 

disruption. See supra at section IV.B.2. 

The current compulsory rates for CDs 

and permanent downloads are rates that 

the copyright owners and copyright 

users have been paying since 2006. In 

addition, the evidence before us 

indicates that a ringtone rate derived 

from the Landes mastertone benchmark 

is comparable to the average rate that 

copyright owners currently receive and 

that copyright users currently pay. 

Therefore, we do not find from the 

record before us that these rates would 

have an adverse impact that is 

substantial, immediate and irreversible 

in the short-run. 

4526 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

47The weakness of RIAA’s interpretation of 

‘‘activities specified by this section’’ is further 

underscored by its particular confinement to the 

category of DPDs. The sentence from which the 

phrase is drawn refers to a proceeding under 

chapter 8 to establish rates and terms for all of 

Section 115, not just DPDs. Pushing RIAA’s 

argument to its logical conclusion would mean that 

we would have to set a general rate for both DPD 

and non-DPD phonorecords (i.e., physical 

products). 

48The Register’s current regulations for the 

Section 115 license are set forth in 37 CFR 201.18– 

19. 

5. Summary of Rates Determined 

In conclusion, the Judges find that our 

consideration of the 801(b) policy 

factors indicates that both a nominal 

rate of 9.1 cents for physical products 

and permanent downloads and a 

nominal rate of 24 cents for ringtones 

are reasonable without further 

adjustment over the term of these 

licenses. 

6. RIAA’s Proposed General DPD Rate 

As previously discussed, the parties 

to this proceeding are asking the Judges 

to establish royalty rates for physical 

phonorecords, permanent downloads 

and ringtones, the parties themselves 

having agreed to rates for limited 

downloads and interactive streaming. 

RIAA insists in its Proposed 

Conclusions of Law that we are 

obligated to establish a catch-all rate for 

DPDs (but not physical product) that are 

not permanent, limited downloads, 

interactive streaming or ringtones. RIAA 

PCL at ¶¶ 164–170. It concludes that 

such a catch-all rate—which it describes 

as a rate for ‘‘general DPDs’’—is 

required by 17 U.S.C. 115(c)(3)(C) of the 

Copyright Act which directs us to 

establish rates and terms ‘‘for the 

activities specified by this section.’’ 

RIAA submits that the correct rate for 

‘‘general DPDs’’ should be the same as 

the one it has proposed for physical 

phonorecords and permanent 

downloads. For the reasons discussed 

below, we decline to adopt RIAA’s 

proposal. 

RIAA’s interpretation of ‘‘the 

activities specified by this section’’ 

incorrectly conflates ‘‘activities’’ with 

its conception of musical products and 

services offered as digital phonorecord 

deliveries. The ‘‘activities’’ referred to in 

section 115 are the making and 

distribution of phonorecords, see 17 

U.S.C. 115 (preamble), not musical 

products and services. Our obligation to 

set rates and terms for the making and 

distribution of phonorecords is 

amplified only with respect to the 

distinction that we must draw between 

phonorecords that are incidental to a 

transmission that constitutes a digital 

phonorecord delivery and ‘‘digital 

phonorecord deliveries in general.’’ 17 

U.S.C. 115(c)(3)(C). Even RIAA does not 

suggest that the latter language creates a 

standalone category, separate from the 

music products and services currently 

offered or which may someday be 

offered, and known as a general DPD.47

In sum, we cannot find any statutory 

obligation that requires us to set a rate 

for general DPDs. 

Furthermore, and even more 

importantly, even if we were to accept 

RIAA’s argument that such a rate must 

be set, RIAA (as well as DiMA and the 

Copyright Owners) has failed to present 

any evidence whatsoever to support a 

rate determination. All RIAA has given 

us is a proposal that the rate for general 

DPDs should be the same as that for 

physical products and permanent 

downloads, plus a couple of oblique 

references to Copyright Owners’ 

witnesses mentioning the possible 

introduction of future hybrid musical 

products. RIAA PCL at ¶ 165. We cannot 

adopt rates for even one of these future 

products in the face of such an empty 

record, let alone a single rate applicable 

to a variety of such products, without 

acting arbitrarily and capriciously. See 

Recording Industry Ass’n of America v. 

Librarian of Congress, 176 F.3d 528, 

535–36 (DC Cir. 1999) (Librarian acted 

improperly by adopting terms with no 

record evidence to support them); 

accord, Nat’l Ass’n of Broadcasters v. 

Librarian of Congress, 146 F. 3d 907, 

924 (DC Cir. 1998) (Librarian must act 

with regard to the record). Nor do we 

see how a convincing record could be 

built at this time due to the speculative 

nature of the products and the 

consequent lack of evidentiary tools that 

we would possess to evaluate them in 

setting rates. 

V. Terms 

Like the webcasting and preexisting 

subscription and satellite digital audio 

radio services proceedings, the current 

proceeding requires the Copyright 

Royalty Judges to establish ‘‘terms of 

royalty payments’’ for the section 115 

license. 17 U.S.C. 115(c)(3)(C). Unlike 

the prior proceedings, however, 

authority to set the terms is divided 

between the Judges and the Register of 

Copyrights.48 RIAA and Copyright 

Owners agreed that the Judges’ authority 

to adopt their proposals was limited to 

provisions related to notice of use of 

copyright owners’ works and 

recordkeeping, though they disagreed as 

to whether the Judges have authority to 

adopt provisions related to late 

payments. On July 25, 2008, the Judges 

referred to the Register of Copyrights 

material questions of substantive law 

concerning the authority to adopt terms, 

and the Register delivered her decision 

on August 8, 2008. See Memorandum 

Opinion on Material Questions of 

Substantive Law, Docket No. RF 2008– 

1 (August 8, 2008); see also, 73 FR 

48396 (August 19, 2008). 

A. Proposals of the Parties 

1. RIAA 

RIAA initially proposed four terms in 

this proceeding. One of the requests 

proposed a term providing that when a 

DPD is not distributed directly by the 

compulsory licensee, it should be 

considered as distributed in the 

accounting period in which it is 

reported to the compulsory licensee, 

contrary to 37 CFR 201.19(a)(6) of the 

Register’s rules which provides that a 

DPD is to be treated as made and 

distributed on the date that it is digitally 

transmitted. RIAA now considers this 

term as being outside the authority of 

the Judges to adopt and is no longer 

proposing it. See Second Amended 

Proposed Rates and Terms of the 

Recording Industry Association of 

America, Inc. at 7, n.2 (‘‘RIAA Second 

Amended Proposal’’). As this proposed 

term is no longer before us, the Judges 

do not consider it. 

The other three terms are as follows. 

First, RIAA asks that we adopt a term 

permitting monthly and annual 

statements of account to be signed by a 

duly authorized agent of the compulsory 

licensee, notwithstanding 37 CFR 

201.19(e)(6) and (f)(6)(i) which require 

that the signature be of a duly 

authorized officer of a corporation or, if 

the licensee is a partnership, a partner. 

RIAA PFF at ¶¶ 1770–71; RIAA Second 

Amended Proposal at 7. Second, RIAA 

requests that an audit performed in the 

ordinary course of business according to 

generally accepted auditing standards 

by an independent and qualified auditor 

serve as acceptable verification in lieu 

of 37 CFR 201.19(f)(6) which requires 

that each annual statement of account 

be certified by a licensed Certified 

Public Accountant. RIAA PFF at 

¶¶ 1772–76; RIAA Second Amended 

Proposal at 7. Third, RIAA requests that 

the Judges issue a regulation 

‘‘clarifying’’ that the Section 115 license 

extends to all reproduction and 

distribution rights that may be necessary 

to engage in activities covered by the 

license, including (1) the making of 

reproductions by and for end users; (2) 

reproductions made on servers; and (3) 

incidental reproductions made under 

authority of the licensee in the normal 

course of engaging in such activities, 

including cached, network, and buffer 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4527 

49Copyright Owners also requested a particular 

definition of revenue, which it identified as a term, 

for the operation of its rate proposal for ringtones. 

Copyright Owners PFF at ¶ 842; Copyright Owners 

Amended Proposed Rates and Terms at 4. However, 

since the Judges are not adopting Copyright 

Owners’ rate proposal for ringtones and instead are 

adopting a penny rate, consideration of a definition 

of revenue is not necessary. 

50Copyright Owners and RIAA presented 

conflicting testimony as to the extent that late 

payments occur under licenses issued by the Harry 

Fox Agency and to the extent that those late 

payments were covered by advances paid by certain 

record companies. Compare 5/19/2008 Tr. 7033–35 

(Pedecine) (70 percent of total dollars owed was 

late, the average lateness of such payments was 80 

days) with RIAA PFF at ¶¶ 1793, 1805 and 1812 

(writers and publishers are the cause of most late 

payments and record companies pay advances to 

cover many late payment situations). 

reproductions. RIAA PFF at ¶¶ 1777–78; 

RIAA Second Amended Proposal at 7. 

RIAA makes two additional requests 

in its Second Amended Proposal that, 

while not stylized as terms, are similar 

in nature to the third request described 

above. These terms are offered as a part 

of RIAA’s alternative rate structure 

which seeks to convert its percentage of 

revenue rate into a penny rate. The first 

calls for an interpretation of the statute 

related to locked content. ‘‘Locked 

content,’’ according to RIAA 

is a recording that has been encrypted or 

degraded so as to be accessible in nondegraded form only for limited previewing 

absent a purchase transaction. For example, 

a computer hard drive or an MP3 player 

might ship with a thousand or more locked 

recordings that would be available for the 

consumer to buy and unlock. 

RIAA PFF at ¶ 1674 (citing testimony of 

Andrea Finkelstein and Mark 

Eisenberg); see also, RIAA Second 

Amended Proposal at 6. RIAA requests 

that the Judges determine that a locked 

content product is considered 

distributed for purposes of the section 

115 license, and the royalty becomes 

payable, when the product is unlocked 

by the consumer. RIAA PFF at ¶ 1676. 

The other term related to RIAA’s 

alternative penny rate proposal is 

related to what RIAA describes as 

‘‘multiple instances.’’ Specifically, 

RIAA seeks a determination from the 

Judges that when there are multiple 

fixations of the same sound recording 

on the same product or as a la carte 

downloads as part of a single 

transaction, the price of the transaction 

should be used to determine the 

applicable rate category and all fixations 

should be considered one for purposes 

of the Section 115 license. RIAA PFF at 

¶ 1678; RIAA Second Amended 

Proposal at 6. This clarification of the 

statute is necessary, according to RIAA, 

so that products such as DualDisc, 

where the same sound recording 

appears on a disc multiple times to 

enable the disc to be played on multiple 

devices or at different levels of sound 

quality, are paid for at the single penny 

rate and not ‘‘multiple instances’’ for all 

reproductions of the same recording. 

RIAA PPF at ¶ 1679. 

2. Copyright Owners 

Copyright Owners propose five terms, 

one of which seeks a clarification of the 

statute. The centerpiece of Copyright 

Owners’ requests, and the one to which 

it supplied the most testimony, is the 

application of a 1.5% per month late fee 

from the day payment should have been 

made to the day payment is actually 

received by a copyright owner. 

Copyright Owners PFF at ¶ 842; 

Copyright Owners Amended Proposed 

Rates and Terms at 3 (July 2, 2008). A 

requested term related to this proposal 

is the recovery of reasonable attorneys 

fees expended by copyright owners to 

collect past due royalties. Copyright 

Owners PFF at ¶ 842; Copyright Owners 

Amended Proposed Rates and Terms at 

4. And a third proposed term, which 

Copyright Owners claim is related to the 

late payment issue, is a 3% passthrough assessment where a compulsory 

licensee authorizes a digital music 

service to make and distribute DPDs. 

Copyright Owners PFF at ¶ 842; 

Copyright Owners Amended Proposed 

Rates and Terms at 3–4. A pass-through 

charge is necessary, according to 

Copyright Owners, because passthrough licenses result in an inability of 

music publishers to audit music 

services, result in payment delays, and 

prevent music publishers from 

establishing direct business 

relationships with music services. 

Copyright Owners PFF at ¶¶ 862–865. 

Copyright Owners’ fourth request is 

related to the audits of compulsory 

licensees that they currently conduct. 

Specifically, Copyright Owners seek a 

term that requires the reporting for each 

specific activity licensed under Section 

115 and, in the case of pass-through 

licenses, the identification of the online 

retailer through which the DPDs 

occurred. Copyright Owners PFF at 

¶ 842; Copyright Owners Amended 

Proposed Rates and Terms at 4. 

The fifth and final term 49 seeks a 

‘‘clarification’’ of 17 U.S.C. 115(c)(2) as 

to when phonorecords are made and 

distributed and therefore when payment 

is calculated and becomes due. 

Copyright Owners request that we 

determine that the royalty fee becomes 

due on the date that a phonorecord is 

distributed, not the date on which it is 

manufactured. Copyright Owners PFF at 

¶¶ 842, 867; Copyright Owners 

Amended Proposed Rates and Terms at 

4. 

3. DiMA 

Consistent with DiMA’s rate proposal 

of a percentage of revenue, DiMA 

proposes a definition of revenue which 

includes definitions of applicable 

receipts, a permanent digital 

phonorecord delivery, a licensee, a 

licensee’s carriers and a licensed work. 

DiMA Second Amended Proposed Rates 

and Terms at 1–3. Because the Judges 

are not adopting a percentage of revenue 

rate structure, consideration of these 

proposed terms is not necessary. This 

leaves DiMA with one proposed term 

which is another request for 

‘‘clarification’’ of the statute. DiMA asks 

the Judges to clarify that the section 115 

license extends to, and includes full 

payment for, all reproductions 

necessary to engage in the activities 

permitted by the license, including 

masters, reproductions on servers, 

cached, network and buffer 

reproductions, and the making of 

reproductions by and for end users. Id. 

B. Adopted Term: Late Fee 

Section 803(c)(7) of the Copyright Act 

provides that a determination of the 

Copyright Royalty Judges may include 

terms with respect to late payment, and 

the Register of Copyrights has confirmed 

that we have authority to adopt terms 

for past due payments for this statutory 

license. See Memorandum Opinion on 

Material Questions of Substantive Law, 

RF 2008–1 at 11 (August 8, 2008), 73 FR 

48399 (August 19, 2008). Consistent 

with our adoption of the same term for 

late payments in the Webcaster II and 

SDARS determinations, 72 FR 24084, 

24107 (May 1, 2007) (Webcaster II), 73 

FR 4080, 4099 (January 24, 2008) 

(SDARS), we are establishing a late 

payment fee of 1.5% per month 

measured from the date the payment 

was due as provided in the regulations 

of the Register. See 37 CFR 

201.19(e)(7)(i). 

RIAA argues that the marketplace for 

mechanical licenses with music 

publishers does not provide for late fees, 

noting their absence in Harry Fox 

Agency licenses50 and certain licensing 

agreements executed by EMI Music 

Publishing and BMI Music Publishing, 

and submits that we are therefore 

precluded from adopting such a term. 

RIAA PFF at ¶¶ 1784–92; RIAA PCL at 

¶¶ 219–20. Were the standard for 

considering terms under the section 115 

license willing buyer/willing seller, we 

might be given pause. However, we are 

directed by the terms of this license to 

establish reasonable terms that are 

consistent with the section 801(b) 

4528 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

51We also believe that RIAA’s proposal would 

add an unnecessary layer of complexity to the 

regulatory process, encouraging, if not requiring, 

compulsory licensees to constantly cross-check the 

Judges’ and Register’s regulations for conflicting 

provisions. 

52Likewise, we make no recommendation to the 

Register to alter or amend her current regulations 

on this point. 

53The surcharge is in effect a triple charge 

because the proposed fee is twice the amount of the 

late fee that we have adopted. 

factors. RIAA does not argue that a 1.5% 

per month late fee is violative of one or 

more of the section 801(b) factors, nor 

that section 801(b) requires a downward 

adjustment of the fee. As we said in 

SDARS, ‘‘[i]n determining an 

appropriate late fee, a balance must be 

struck between providing an effective 

incentive to the licensee to make 

payments timely on the one hand and 

not making the fee so high that it is 

punitive on the other hand.’’ 73 FR at 

4099 (also applying the section 801(b) 

factors). We determine that the 1.5% 

late fee achieves this balance. 

In further resisting a late payment fee, 

RIAA argues that late payments are 

often not the fault of the record 

companies and are often the result of 

songwriters and producers in certain 

genres of music failing to agree as to the 

appropriate ‘‘copyright splits’’—i.e., 

who and how many individuals have 

contributed copyrightable authorship to 

the creation of a musical work and are 

therefore entitled to royalties. RIAA PFF 

at ¶¶ 1793–1804. RIAA also faults 

music publishers for internal 

administrative failings which, according 

to RIAA, often result in record 

companies being unable to timely pay 

royalties to the correct recipients. RIAA 

PFF at ¶¶ 1793–1804. The reasons for 

why payments are late, however, 

represent the parties’ disagreement with 

the payment requirements set forth in 

the statute and in the Register of 

Copyrights’ regulations. See 37 CFR 

201.19(e)(7), (f)(7). If users of the 

Section 115 license cannot possibly 

make payments in compliance with 

those requirements, then they must seek 

redress from the Congress or the 

Copyright Office. They have no bearing 

on our determination where we have 

not been presented with testimony that 

a 1.5% per month late fee is so 

burdensome and unfair as to escape the 

bounds of reasonableness as defined by 

Section 801(b). 

C. Terms Not Adopted 

Putting aside the question of the 

Judges’ authority vis-a`-vis the Register of 

Copyright to adopt particular types of 

terms, the Judges determine that there 

are immensely practical reasons for not 

adopting the remaining terms that the 

parties propose. Two of RIAA’s 

proposed terms—permitting duly 

authorized agents to sign statements of 

account and permitting annual 

statements of account to be verified by 

non-certified auditors—are contrary to 

express provisions set forth in the 

Register’s regulations. See 37 CFR 

201.19(e)(6) and (f)(6)(i) (statement of 

account must be signed by officer of a 

corporation or a partner), 17 U.S.C. 

115(c)(5) and 37 CFR 201.19(f)(6) 

(annual statement of account must be 

certified by licensed Certified Public 

Accountant). Were the Judges to adopt 

these two proposals, members of the 

public seeking to use the Section 115 

license would be required to choose 

between the Judges’ and the Register’s 

regulations in completing their 

statements of account or to determine 

whether compliance with both sets of 

regulations was required.51 Given that 

RIAA failed to produce compelling 

evidence that the Register’s regulations 

are so burdensome as to require the 

adoption of contrary provisions, we 

decline to adopt RIAA’s proposed 

terms.52

The same reasoning applies to 

Copyright Owners’ request for the 

reporting of royalties earned for each 

specific configuration of a licensed 

product. The Register’s regulations 

governing both the monthly and annual 

statements of account already provide 

that each report identify the 

configuration of the product involved. 

See 37 CFR 201.19(e)(3)(ii) (monthly 

statement), 37 CFR 201.19(f)(4) (annual 

statement). We likewise decline to adopt 

Copyright Owners’ request for 

identification of a digital music service 

provider operating pursuant to a passthrough license. Copyright Owners 

suggested that such a requirement might 

assist copyright owners’ auditing efforts 

but failed to demonstrate that the 

effectiveness of auditing is foreclosed by 

the lack of such information. 

Copyright Owners ask us to adopt a 

3% surcharge on royalties for all passthrough licensing arrangements arguing 

that such a provision is necessary 

because these arrangements frequently 

result in late payments and eliminate 

music publishers’ opportunities to 

interact with pass-through licensees. 

Copyright Owners PFF at ¶¶ 842, 862. 

We have already adopted a late fee 

requirement and decline to adopt an 

additional one 53 because of the nature 

of the licensing arrangement, which is 

permitted by 17 U.S.C. 115(a)(3)(A). To 

the extent that the proposed fee is not 

another late charge but is a request for 

a higher royalty rate for pass-through 

licenses, we decline to adopt the 

proposal because Copyright Owners 

failed to present any credible testimony 

or marketplace evidence supporting the 

3% figure. For the same reasons, we also 

decline to adopt Copyright Owners’ 

request for attorneys fees on the 

collection of late payments. See 

Copyright Owners PFF at ¶¶ 842, 866. 

In addition, Section 115(c)(6) 

enumerates the remedy for 

noncompliance by a compulsory 

licensee, which does not include the 

attorneys fees requested by Copyright 

Owners. 

The remaining proposals of the 

parties fall within the rubric of requests 

for ‘‘clarification’’ of the statute. DiMA 

seeks a determination as to the scope of 

the license with respect to copies made 

in the delivery of digital music. DiMA 

PFF at ¶ 240; DiMA Second Amended 

Proposed Rates and Terms at 4. RIAA 

makes the same request, albeit 

proposing slightly different language. 

RIAA also seeks a determination that 

product containing musical works is not 

distributed (described by RIAA as 

‘‘unlocked’’) until accessed by the 

consumer, plus a determination that 

multiple reproductions contained 

within a single product are considered 

only one licensed instance—and 

generating only one royalty fee—under 

the statute. RIAA PFF at ¶¶ 1674–76, 

1678–82; RIAA Second Amended 

Proposal at 6. And Copyright Owners 

seek a ruling that the royalty obligation 

of the statute is triggered when a 

product is manufactured and 

distributed, as opposed to only 

manufactured. Copyright Owners PFF at 

¶¶ 842, 867; Copyright Owners 

Amended Proposed Rates and Terms at 

4. All of these requests suffer from the 

same infirmity: they require the Judges 

to interpret the scope, operation and/or 

obligations of the Section 115 license, 

which is inconsistent with our authority 

in the proceeding to establish rates and 

terms of royalty payments. Accord, 

Memorandum Opinion on Material 

Questions of Law, Docket No. RF 2008– 

1 at 10 (August 8, 2008); see also, 73 FR 

48399 (August 19, 2008). We therefore 

decline to adopt them. 

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 

Determination of the Rates and Terms 

for the making and distribution of 

phonorecords, including digital 

phonorecord deliveries (‘‘DPDs’’), under 

the compulsory license set forth in 

section 115 of the Copyright Act. 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4529 

So Ordered. 

James Scott Sledge, 

Chief U.S. Copyright Royalty Judge. 

William J. Roberts, Jr., 

Copyright Royalty Judge. 

Stanley C. Wisniewski, 

Copyright Royalty Judge. 

Dated: November 24, 2008. 

List of Subjects in 37 CFR Part 385 

Copyright, Phonorecords, Recordings. 

Final Regulations 

■ For the reasons set forth in the 

preamble, the Copyright Royalty Judges 

are adding Part 385 to Chapter III of title 

37 of the Code of Federal Regulations to 

read as follows: 

PART 385—RATES AND TERMS FOR 

USE OF MUSICAL WORKS UNDER 

COMPULSORY LICENSE FOR MAKING 

AND DISTRIBUTING OF PHYSICAL 

AND DIGITAL PHONORECORDS 

Subpart A—Physical Phonorecord 

Deliveries, Permanent Digital Downloads 

and Ringtones 

Sec. 

385.1 General. 

385.2 Definitions. 

385.3 Royalty rates for making and 

distributing phonorecords. 

385.4 Late payments. 

Subpart B—Interactive Streaming, Other 

Incidental Digital Phonorecord Deliveries 

and Limited Downloads 

Sec. 

385.10 General. 

385.11 Definitions. 

385.12 Calculation of royalty payments in 

general. 

385.13 Minimum royalty rates and 

subscriber-based royalty floors for 

specific types of services. 

385.14 Promotional royalty rate. 

385.15 Timing of payments. 

385.16 Reproduction and distribution rights 

covered. 

385.17 Effect of rates. 

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

804(b)(4). 

Subpart A—Physical Phonorecord 

Deliveries, Permanent Digital 

Downloads and Ringtones 

§ 385.1 General. 

(a) Scope. This subpart establishes 

rates and terms of royalty payments for 

making and distributing phonorecords, 

including by means of digital 

phonorecord deliveries, in accordance 

with the provisions of 17 U.S.C. 115. 

(b) Legal compliance. Licensees 

relying upon the compulsory license set 

forth in 17 U.S.C. 115 shall comply with 

the requirements of that section, the 

rates and terms of this subpart, and any 

other applicable regulations. 

(c) Relationship to voluntary 

agreements. Notwithstanding the 

royalty rates and terms established in 

this subpart, the rates and terms of any 

license agreements entered into by 

Copyright Owners and Licensees shall 

apply in lieu of the rates and terms of 

this subpart to use of musical works 

within the scope of such agreements. 

§ 385.2 Definitions. 

For purposes of this subpart, the 

following definitions apply: 

Copyright Owners are nondramatic 

musical work copyright owners who are 

entitled to royalty payments made 

under this subpart pursuant to the 

compulsory license under 17 U.S.C. 

115. 

Digital phonorecord delivery means a 

digital phonorecord delivery as defined 

in 17 U.S.C. 115(d). 

Licensee is a person or entity that has 

obtained a compulsory license under 17 

U.S.C. 115, and the implementing 

regulations, to make and distribute 

phonorecords of a nondramatic musical 

work, including by means of a digital 

phonorecord delivery. 

Permanent digital download means a 

digital phonorecord delivery that is 

distributed in the form of a download 

that may be retained and played on a 

permanent basis. 

Ringtone means a phonorecord of a 

partial musical work distributed as a 

digital phonorecord delivery in a format 

to be made resident on a 

telecommunications device for use to 

announce the reception of an incoming 

telephone call or other communication 

or message or to alert the receiver to the 

fact that there is a communication or 

message. 

§ 385.3 Royalty rates for making and 

distributing phonorecords. 

(a) Physical phonorecord deliveries 

and permanent digital downloads. For 

every physical phonorecord and 

permanent digital download made and 

distributed, the royalty rate payable for 

each work embodied in such 

phonorecord shall be either 9.1 cents or 

1.75 cents per minute of playing time or 

fraction thereof, whichever amount is 

larger. 

(b) Ringtones. For every ringtone 

made and distributed, the royalty rate 

payable for each work embodied therein 

shall be 24 cents. 

§ 385.4 Late payments. 

A Licensee shall pay a late fee of 1.5% 

per month, or the highest lawful rate, 

whichever is lower, for any payment 

received by the Copyright Owner after 

the due date set forth in ( 201.19(e)(7)(i) 

of this title. Late fees shall accrue from 

the due date until payment is received 

by the Copyright Owner. 

Subpart B—Interactive Streaming, 

Other Incidental Digital Phonorecord 

Deliveries and Limited Downloads 

§ 385.10 General. 

(a) Scope. This subpart establishes 

rates and terms of royalty payments for 

interactive streams and limited 

downloads of musical works by 

subscription and nonsubscription 

digital music services in accordance 

with the provisions of 17 U.S.C. 115. 

(b) Legal compliance. A licensee that 

makes or authorizes interactive streams 

or limited downloads of musical works 

through subscription or nonsubscription 

digital music services pursuant to 17 

U.S.C. 115 shall comply with the 

requirements of that section, the rates 

and terms of this subpart, and any other 

applicable regulations. 

§ 385.11 Definitions. 

For purposes of this subpart, the 

following definitions shall apply: 

Interactive stream means a stream of 

a sound recording of a musical work, 

where the performance of the sound 

recording by means of the stream is not 

exempt under 17 U.S.C. 114(d)(1) and 

does not in itself or as a result of a 

program in which it is included qualify 

for statutory licensing under 17 U.S.C. 

114(d)(2). An interactive stream is an 

incidental digital phonorecord delivery 

under 17 U.S.C. 115(c)(3)(C) and (D). 

Licensee means a person that has 

obtained a compulsory license under 17 

U.S.C. 115 and its implementing 

regulations. 

Licensed activity means interactive 

streams or limited downloads of 

musical works, as applicable. 

Limited download means a digital 

transmission of a sound recording of a 

musical work to an end user, other than 

a stream, that results in a specifically 

identifiable reproduction of that sound 

recording that is only accessible for 

listening for— 

(1) An amount of time not to exceed 

1 month from the time of the 

transmission (unless the service, in lieu 

of retransmitting the same sound 

recording as another limited download, 

separately and upon specific request of 

the end user made through a live 

network connection, reauthorizes use 

for another time period not to exceed 1 

month), or in the case of a subscription 

transmission, a period of time following 

the end of the applicable subscription 

no longer than a subscription renewal 

period or 3 months, whichever is 

shorter; or 

(2) A specified number of times not to 

exceed 12 (unless the service, in lieu of 

4530 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

retransmitting the same sound recording 

as another limited download, separately 

and upon specific request of the end 

user made through a live network 

connection, reauthorizes use of another 

series of 12 or fewer plays), or in the 

case of a subscription transmission, 12 

times after the end of the applicable 

subscription. 

(3) A limited download is a general 

digital phonorecord delivery under 17 

U.S.C. 115(c)(3)(C) and (D). 

Offering means a service’s offering of 

licensed activity that is subject to a 

particular rate set forth in § 385.13(a) 

(e.g., a particular subscription plan 

available through the service). 

Promotional royalty rate means the 

statutory royalty rate of zero in the case 

of certain promotional interactive 

streams and certain promotional limited 

downloads, as provided in § 385.14. 

Publication date means January 26, 

2009. 

Record company means a person or 

entity that 

(1) Is a copyright owner of a sound 

recording of a musical work; 

(2) In the case of a sound recording of 

a musical work fixed before February 

15, 1972, has rights to the sound 

recording, under the common law or 

statutes of any State, that are equivalent 

to the rights of a copyright owner of a 

sound recording of a musical work 

under title 17, United States Code; 

(3) Is an exclusive licensee of the 

rights to reproduce and distribute a 

sound recording of a musical work; or 

(4) Performs the functions of 

marketing and authorizing the 

distribution of a sound recording of a 

musical work under its own label, under 

the authority of the copyright owner of 

the sound recording. 

Relevant page means a page 

(including a Web page, screen or 

display) from which licensed activity 

offered by a service is directly available 

to end users, but only where the offering 

of licensed activity and content that 

directly relates to the offering of 

licensed activity (e.g., an image of the 

artist or artwork closely associated with 

such offering, artist or album 

information, reviews of such offering, 

credits and music player controls) 

comprises 75% or more of the space on 

that page, excluding any space occupied 

by advertising. A licensed activity is 

directly available to end users from a 

page if sound recordings of musical 

works can be accessed by end users for 

limited downloads or interactive 

streams from such page (in most cases 

this will be the page where the limited 

download or interactive stream takes 

place). 

Service means that entity (which may 

or may not be the licensee) that, with 

respect to the licensed activity, 

(1) Contracts with or has a direct 

relationship with end users in a case 

where a contract or relationship exists, 

or otherwise controls the content made 

available to end users; 

(2) Is able to report fully on service 

revenue from the provision of the 

licensed activity to the public, and to 

the extent applicable, verify service 

revenue through an audit; and 

(3) Is able to report fully on usage of 

musical works by the service, or procure 

such reporting, and to the extent 

applicable, verify usage through an 

audit. 

Service revenue. (1) Subject to 

paragraphs (2) through (5) of the 

definition of ‘‘Service revenue,’’ and 

subject to U.S. Generally Accepted 

Accounting Principles, service revenue 

shall mean the following: 

(i) All revenue recognized by the 

service from end users from the 

provision of licensed activity; 

(ii) All revenue recognized by the 

service by way of sponsorship and 

commissions as a result of the inclusion 

of third-party ‘‘in-stream’’ or ‘‘indownload’’ advertising as part of 

licensed activity (i.e., advertising placed 

immediately at the start, end or during 

the actual delivery, by way of 

interactive streaming or limited 

downloads, as applicable, of a musical 

work); and 

(iii) All revenue recognized by the 

service, including by way of 

sponsorship and commissions, as a 

result of the placement of third-party 

advertising on a relevant page of the 

service or on any page that directly 

follows such relevant page leading up to 

and including the limited download or 

interactive streaming, as applicable, of a 

musical work; provided that, in the case 

where more than one service is actually 

available to end users from a relevant 

page, any advertising revenue shall be 

allocated between such services on the 

basis of the relative amounts of the page 

they occupy. 

(2) In each of the cases identified in 

paragraph (1) of the definition of 

‘‘Service revenue,’’ such revenue shall, 

for the avoidance of doubt, 

(i) Include any such revenue 

recognized by the service, or if not 

recognized by the service, by any 

associate, affiliate, agent or 

representative of such service in lieu of 

its being recognized by the service; 

(ii) Include the value of any barter or 

other nonmonetary consideration; 

(iii) Not be reduced by credit card 

commissions or similar payment 

process charges; and 

(iv) Except as expressly set forth in 

this subpart, not be subject to any other 

deduction or set-off other than refunds 

to end users for licensed activity that 

they were unable to use due to technical 

faults in the licensed activity or other 

bona fide refunds or credits issued to 

end users in the ordinary course of 

business. 

(3) In each of the cases identified in 

paragraph (1) of the definition of 

‘‘Service revenue,’’ such revenue shall, 

for the avoidance of doubt, exclude 

revenue derived solely in connection 

with services and activities other than 

licensed activity, provided that 

advertising or sponsorship revenue shall 

be treated as provided in paragraphs (2) 

and (4) of the definition of ‘‘Service 

revenue.’’ By way of example, the 

following kinds of revenue shall be 

excluded: 

(i) Revenue derived from non-music 

voice, content and text services; 

(ii) Revenue derived from other nonmusic products and services (including 

search services, sponsored searches and 

click-through commissions); and 

(iii) Revenue derived from music or 

music-related products and services that 

are not or do not include licensed 

activity. 

(4) For purposes of paragraph (1) of 

the definition of ‘‘Service revenue,’’ 

advertising or sponsorship revenue shall 

be reduced by the actual cost of 

obtaining such revenue, not to exceed 

15%. 

(5) Where the licensed activity is 

provided to end users as part of the 

same transaction with one or more other 

products or services that are not a music 

service engaged in licensed activity, 

then the revenue deemed to be 

recognized from end users for the 

service for the purpose of the definition 

in paragraph (1) of the definition of 

‘‘Service revenue’’ shall be the revenue 

recognized from end users for the 

bundle less the standalone published 

price for end users for each of the other 

component(s) of the bundle; provided 

that, if there is no such standalone 

published price for a component of the 

bundle, then the average standalone 

published price for end users for the 

most closely comparable product or 

service in the U.S. shall be used or, if 

more than one such comparable exists, 

the average of such standalone prices for 

such comparables shall be used. In 

connection with such a bundle, if a 

record company providing sound 

recording rights to the service 

(i) Recognizes revenue (in accordance 

with U.S. Generally Accepted 

Accounting Principles, and including 

for the avoidance of doubt barter or 

nonmonetary consideration) from a 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4531 

person or entity other than the service 

providing the licensed activity and; 

(ii) Such revenue is received, in the 

context of the transactions involved, as 

consideration for the ability to make 

interactive streams or limited 

downloads of sound recordings, then 

such revenue shall be added to the 

amounts expensed by the service for 

purposes of § 385.13(b). Where the 

service is the licensee, if the service 

provides the record company all 

information necessary for the record 

company to determine whether 

additional royalties are payable by the 

service hereunder as a result of revenue 

recognized from a person or entity other 

than the service as described in the 

immediately preceding sentence, then 

the record company shall provide such 

further information as necessary for the 

service to calculate the additional 

royalties and indemnify the service for 

such additional royalties. The sole 

obligation of the record company shall 

be to pay the licensee such additional 

royalties if actually payable as royalties 

hereunder; provided, however, that this 

shall not affect any otherwise existing 

right or remedy of the copyright owner 

nor diminish the licensee’s obligations 

to the copyright owner. 

Stream means the digital transmission 

of a sound recording of a musical work 

to an end user— 

(1) To allow the end user to listen to 

the sound recording, while maintaining 

a live network connection to the 

transmitting service, substantially at the 

time of transmission, except to the 

extent that the sound recording remains 

accessible for future listening from a 

streaming cache reproduction; 

(2) Using technology that is designed 

such that the sound recording does not 

remain accessible for future listening, 

except to the extent that the sound 

recording remains accessible for future 

listening from a streaming cache 

reproduction; and 

(3) That is also subject to licensing as 

a public performance of the musical 

work. 

Streaming cache reproduction means 

a reproduction of a sound recording of 

a musical work made on a computer or 

other receiving device by a service 

solely for the purpose of permitting an 

end user who has previously received a 

stream of such sound recording to play 

such sound recording again from local 

storage on such computer or other 

device rather than by means of a 

transmission; provided that the user is 

only able to do so while maintaining a 

live network connection to the service, 

and such reproduction is encrypted or 

otherwise protected consistent with 

prevailing industry standards to prevent 

it from being played in any other 

manner or on any device other than the 

computer or other device on which it 

was originally made. 

Subscription service means a digital 

music service for which end users are 

required to pay a fee to access the 

service for defined subscription periods 

of 3 years or less (in contrast to, for 

example, a service where the basic 

charge to users is a payment per 

download or per play), whether such 

payment is made for access to the 

service on a standalone basis or as part 

of a bundle with one or more other 

products or services, and including any 

use of such a service on a trial basis 

without charge as described in 

§ 385.14(b). 

§ 385.12 Calculation of royalty payments 

in general. 

(a) Applicable royalty. Licensees that 

make or authorize licensed activity 

pursuant to 17 U.S.C. 115 shall pay 

royalties therefor that are calculated as 

provided in this section, subject to the 

minimum royalties and subscriberbased royalty floors for specific types of 

services provided in § 385.13, except as 

provided for certain promotional uses in 

§ 385.14. 

(b) Rate calculation methodology. 

Royalty payments for licensed activity 

shall be calculated as provided in 

paragraph (b) of this section. If a service 

includes different offerings, royalties 

must be separately calculated with 

respect to each such offering. Uses 

subject to the promotional royalty rate 

shall be excluded from the calculation 

of royalties due, as further described in 

this section and the following § 385.13. 

(1) Step 1: Calculate the All-In 

Royalty for the Service. For each 

accounting period, the all-in royalty for 

each offering of the service is the greater 

of 

(i) The applicable percentage of 

service revenue as set forth in paragraph 

(c) of this section (excluding any service 

revenue derived solely from licensed 

activity uses subject to the promotional 

royalty rate), and 

(ii) The minimum specified in 

§ 385.13 of the offering involved. 

(2) Step 2: Subtract Applicable 

Performance Royalties. From the 

amount determined in step 1 in 

paragraph (b)(1) of this section, for each 

offering of the service, subtract the total 

amount of royalties for public 

performance of musical works that has 

been or will be expensed by the service 

pursuant to public performance licenses 

in connection with uses of musical 

works through such offering during the 

accounting period that constitute 

licensed activity (other than licensed 

activity subject to the promotional 

royalty rate). While this amount may be 

the total of the service’s payments for 

that offering for the accounting period 

under its agreements with performing 

rights societies as defined in 17 U.S.C. 

101, it will be less than the total of such 

public performance payments if the 

service is also engaging in public 

performance of musical works that does 

not constitute licensed activity. In the 

latter case, the amount to be subtracted 

for public performance payments shall 

be the amount of such payments 

allocable to licensed activity uses (other 

than promotional royalty rate uses) 

through the relevant offering, as 

determined in relation to all uses of 

musical works for which the public 

performance payments are made for the 

accounting period. Such allocation shall 

be made on the basis of plays of musical 

works or, where per-play information is 

unavailable due to bona fide technical 

limitations as described in step 4 in 

paragraph (b)(4) of this section, using 

the same alternative methodology as 

provided in step 4. 

(3) Step 3: Determine the Payable 

Royalty Pool. This is the amount 

payable for the reproduction and 

distribution of all musical works used 

by the service by virtue of its licensed 

activity for a particular offering during 

the accounting period. This amount is 

the greater of 

(i) The result determined in step 2 in 

paragraph (b)(2) of this section, and 

(ii) The subscriber-based royalty floor 

resulting from the calculations 

described in § 385.13. 

(4) Step 4: Calculate the Per-Work 

Royalty Allocation for Each Relevant 

Work. This is the amount payable for 

the reproduction and distribution of 

each musical work used by the service 

by virtue of its licensed activity through 

a particular offering during the 

accounting period. To determine this 

amount, the result determined in step 3 

in paragraph (b)(3) of this section must 

be allocated to each musical work used 

through the offering. The allocation 

shall be accomplished by dividing the 

payable royalty pool determined in step 

3 for such offering by the total number 

of plays of all musical works through 

such offering during the accounting 

period (other than promotional royalty 

rate plays) to yield a per-play allocation, 

and multiplying that result by the 

number of plays of each musical work 

(other than promotional royalty rate 

plays) through the offering during the 

accounting period. For purposes of 

determining the per-work royalty 

allocation in all calculations under this 

step 4 only (i.e., after the payable royalty 

pool has been determined), for sound 

4532 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

recordings of musical works with a 

playing time of over 5 minutes, each 

play on or after October 1, 2010 shall be 

counted as provided in paragraph (d) of 

this section. Notwithstanding the 

foregoing, if the service is not capable of 

tracking play information due to bona 

fide limitations of the available 

technology for services of that nature or 

of devices useable with the service, the 

per-work royalty allocation may instead 

be accomplished in a manner consistent 

with the methodology used by the 

service for making royalty payment 

allocations for the use of individual 

sound recordings. 

(c) Percentage of service revenue. The 

percentage of service revenue applicable 

under paragraph (b) of this section is 

10.5%, except that such percentage 

shall be discounted by 2% (i.e., to 8.5%) 

in the case of licensed activity occurring 

on or before December 31, 2007. 

(d) Overtime adjustment. For licensed 

activity on or after October 1, 2010, for 

purposes of the calculations in step 4 in 

paragraph (b)(4) of this section only, for 

sound recordings of musical works with 

a playing time of over 5 minutes, adjust 

the number of plays as follows: 

(1) 5:01 to 6:00 minutes—Each play = 

1.2 plays 

(2) 6:01 to 7:00 minutes—Each play = 

1.4 plays 

(3) 7:01 to 8:00 minutes—Each play = 

1.6 plays 

(4) 8:01 to 9:00 minutes—Each play = 

1.8 plays 

(5) 9:01 to 10:00 minutes—Each play 

= 2.0 plays 

(6) For playing times of greater than 

10 minutes, continue to add .2 for each 

additional minute or fraction thereof. 

(e) Accounting. The calculations 

required by paragraph (b) of this section 

shall be made in good faith and on the 

basis of the best knowledge, information 

and belief of the licensee at the time 

payment is due, and subject to the 

additional accounting and certification 

requirements of 17 U.S.C. 115(c)(5) and 

§ 201.19 of this title. Without limitation, 

a licensee’s statements of account shall 

set forth each step of its calculations 

with sufficient information to allow the 

copyright owner to assess the accuracy 

and manner in which the licensee 

determined the payable royalty pool and 

per-play allocations (including 

information sufficient to demonstrate 

whether and how a minimum royalty or 

subscriber-based royalty floor pursuant 

to § 385.13 does or does not apply) and, 

for each offering reported, also indicate 

the type of licensed activity involved 

and the number of plays of each musical 

work (including an indication of any 

overtime adjustment applied) that is the 

basis of the per-work royalty allocation 

being paid. 

§ 385.13 Minimum royalty rates and 

subscriber-based royalty floors for specific 

types of services. 

(a) In general. The following 

minimum royalty rates and subscriberbased royalty floors shall apply to the 

following types of licensed activity: 

(1) Standalone non-portable 

subscription—streaming only. Except as 

provided in paragraph (a)(4) of this 

section, in the case of a subscription 

service through which an end user can 

listen to sound recordings only in the 

form of interactive streams and only 

from a non-portable device to which 

such streams are originally transmitted 

while the device has a live network 

connection, the minimum for use in 

step 1 of § 385.12(b)(1) is the lesser of 

subminimum II as described in 

paragraph (c) of this section for the 

accounting period and the aggregate 

amount of 50 cents per subscriber per 

month. The subscriber-based royalty 

floor for use in step 3 of § 385.12(b)(3) 

is the aggregate amount of 15 cents per 

subscriber per month. 

(2) Standalone non-portable 

subscription—mixed. Except as 

provided in paragraph (a)(4) of this 

section, in the case of a subscription 

service through which an end user can 

listen to sound recordings either in the 

form of interactive streams or limited 

downloads but only from a non-portable 

device to which such streams or 

downloads are originally transmitted, 

the minimum for use in step 1 of 

§ 385.12(b)(1) is the lesser of the 

subminimum I as described in 

paragraph (b) of this section for the 

accounting period and the aggregate 

amount of 50 cents per subscriber per 

month. The subscriber-based royalty 

floor for use in step 3 of § 385.12(b)(3) 

is the aggregate amount of 30 cents per 

subscriber per month. 

(3) Standalone portable subscription 

service. Except as provided in paragraph 

(a)(4) of this section, in the case of a 

subscription service through which an 

end user can listen to sound recordings 

in the form of interactive streams or 

limited downloads from a portable 

device, the minimum for use in step 1 

of § 385.12(b)(1) is the lesser of 

subminimum I as described in 

paragraph (b) of this section for the 

accounting period and the aggregate 

amount of 80 cents per subscriber per 

month. The subscriber-based royalty 

floor for use in step 3 of § 385.12(b)(3) 

is the aggregate amount of 50 cents per 

subscriber per month. 

(4) Bundled subscription services. In 

the case of a subscription service made 

available to end users with one or more 

other products or services as part of a 

single transaction without pricing for 

the subscription service separate from 

the product(s) or service(s) with which 

it is made available (e.g., a case in 

which a user can buy a portable device 

and one-year access to a subscription 

service for a single price), the minimum 

for use in step 1 of § 385.12(b)(1) is 

subminimum I as described in 

paragraph (b) of this section for the 

accounting period. The subscriber-based 

royalty floor for use in step 3 of 

§ 385.12(b)(3) is the aggregate amount of 

25 cents per month for each end user 

who has made at least one play of a 

licensed work during such month (each 

such end user to be considered an 

‘‘active subscriber’’). 

(5) Free nonsubscription/adsupported services. In the case of a 

service offering licensed activity free of 

any charge to the end user, the 

minimum for use in step 1 of 

§ 385.12(b)(1) is subminimum II 

described in paragraph (c) of this 

section for the accounting period. There 

is no subscriber-based royalty floor for 

use in step 3 of § 385.12(b)(3). 

(b) Computation of subminimum I. 

For purposes of paragraphs (a)(2), (3) 

and (4) of this section, and with 

reference to paragraph (5) of the 

definition of ‘‘service revenue’’ in 

§ 385.11 if applicable, subminimum I for 

an accounting period means the 

aggregate of the following with respect 

to all sound recordings of musical works 

used in the relevant offering of the 

service during the accounting period— 

(1) In cases in which a record 

company is the licensee under 17 U.S.C. 

115 and a third-party service has 

obtained from the record company the 

rights to make interactive streams or 

limited downloads of a sound recording 

together with the right to reproduce and 

distribute the musical work embodied 

therein, 17.36% of the total amount 

expensed by the service in accordance 

with U.S. Generally Accepted 

Accounting Principles, which for the 

avoidance of doubt shall include the 

value of any barter or other 

nonmonetary consideration provided by 

the service, for such rights for the 

accounting period, except that for 

licensed activity occurring on or before 

December 31, 2007, subminimum I for 

an accounting period shall be 14.53% of 

the amount expensed by the service for 

such rights for the accounting period. 

(2) In cases in which the relevant 

service is the licensee under 17 U.S.C. 

115 and the relevant service has 

obtained from a third-party record 

company the rights to make interactive 

streams or limited downloads of a 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4533 

sound recording without the right to 

reproduce and distribute the musical 

work embodied therein, 21% of the total 

amount expensed by the service in 

accordance with U.S. Generally 

Accepted Accounting Principles, which 

for the avoidance of doubt shall include 

the value of any barter or other 

nonmonetary consideration provided by 

the service, for such sound recording 

rights for the accounting period, except 

that for licensed activity occurring on or 

before December 31, 2007, subminimum 

I for an accounting period shall be 17% 

of the amount expensed by the service 

for such sound recording rights for the 

accounting period. 

(c) Computation of subminimum II. 

For purposes of paragraphs(a)(1) and (5) 

of this section, subminimum II for an 

accounting period means the aggregate 

of the following with respect to all 

sound recordings of musical works used 

by the relevant service during the 

accounting period— 

(1) In cases in which a record 

company is the licensee under 17 U.S.C. 

115 and a third-party service has 

obtained from the record company the 

rights to make interactive streams and 

limited downloads of a sound recording 

together with the right to reproduce and 

distribute the musical work embodied 

therein, 18% of the total amount 

expensed by the service in accordance 

with U.S. Generally Accepted 

Accounting Principles, which for the 

avoidance of doubt shall include the 

value of any barter or other 

nonmonetary consideration provided by 

the service, for such rights for the 

accounting period, except that for 

licensed activity occurring on or before 

December 31, 2007, subminimum II for 

an accounting period shall be 14.53% of 

the amount expensed by the service for 

such rights for the accounting period. 

(2) In cases in which the relevant 

service is the licensee under 17 U.S.C. 

115 and the relevant service has 

obtained from a third-party record 

company the rights to make interactive 

streams or limited downloads of a 

sound recording without the right to 

reproduce and distribute the musical 

work embodied therein, 22% of the total 

amount expensed by the service in 

accordance with U.S. Generally 

Accepted Accounting Principles, which 

for the avoidance of doubt shall include 

the value of any barter or other 

nonmonetary consideration provided by 

the service, for such sound recording 

rights for the accounting period, except 

that for licensed activity occurring on or 

before December 31, 2007, subminimum 

II for an accounting period shall be 17% 

of the amount expensed by the service 

for such sound recording rights for the 

accounting period. 

(d) Computation of subscriber-based 

royalty rates. For purposes of paragraph 

(a) of this section, to determine the 

minimum or subscriber-based royalty 

floor, as applicable to any particular 

offering, the service shall for the 

relevant offering calculate its total 

number of subscriber-months for the 

accounting period, taking into account 

all end users who were subscribers for 

complete calendar months, prorating in 

the case of end users who were 

subscribers for only part of a calendar 

month, and deducting on a prorated 

basis for end users covered by a free 

trial period subject to the promotional 

royalty rate as described in 

§ 385.14(b)(2), except that in the case of 

a bundled subscription service, 

subscriber-months shall instead be 

determined with respect to active 

subscribers as defined in paragraph 

(a)(4) of this section. The product of the 

total number of subscriber-months for 

the accounting period and the specified 

number of cents per subscriber (or 

active subscriber, as the case may be) 

shall be used as the subscriber-based 

component of the minimum or 

subscriber-based royalty floor, as 

applicable, for the accounting period. 

§ 385.14 Promotional royalty rate. 

(a) General provisions. (1) This 

section establishes a royalty rate of zero 

in the case of certain promotional 

interactive streaming activities, and of 

certain promotional limited downloads 

offered in the context of a free trial 

period for a digital music subscription 

service under a license pursuant to 17 

U.S.C. 115. Subject to the requirements 

of 17 U.S.C. 115 and the additional 

provisions of paragraphs (b) through (e) 

of this section, the promotional royalty 

rate shall apply to a musical work when 

a record company transmits or 

authorizes the transmission of 

interactive streams or limited 

downloads of a sound recording that 

embodies such musical work, only if— 

(i) The primary purpose of the record 

company in making or authorizing the 

interactive streams or limited 

downloads is to promote the sale or 

other paid use of sound recordings by 

the relevant artists, including such 

sound recording, through established 

retail channels or the paid use of one or 

more established retail music services 

through which the sound recording is 

available, and not to promote any other 

good or service; 

(ii) Either— 

(A) The sound recording (or a 

different version of the sound recording 

embodying the same musical work) is 

being lawfully distributed and offered to 

consumers through the established retail 

channels or services described in 

paragraph (a)(1)(i) of this section; or 

(B) In the case of a sound recording 

of a musical work being prepared for 

commercial release but not yet released, 

the record company has a good faith 

intention of lawfully distributing and 

offering to consumers the sound 

recording (or a different version of the 

sound recording embodying the same 

musical work) through the established 

retail channels or services described in 

paragraph (a)(1)(i) of this section within 

90 days after the commencement of the 

first promotional use authorized under 

this section (and in fact does so, unless 

it can demonstrate that notwithstanding 

its bona fide intention, it unexpectedly 

did not meet the scheduled release 

date); 

(iii) In connection with authorizing 

the promotional interactive streams or 

limited downloads, the record company 

has obtained from the service it 

authorizes a written representation 

that— 

(A) In the case of a promotional use 

commencing on or after October 1, 2010, 

except interactive streaming subject to 

paragraph (d) of this section, the service 

agrees to maintain for a period of no less 

than 5 years from the conclusion of the 

promotional activity complete and 

accurate records of the relevant 

authorization and dates on which the 

promotion was conducted, and 

identifying each sound recording of a 

musical work made available through 

the promotion, the licensed activity 

involved, and the number of plays of 

such recording; 

(B) The service is in all material 

respects operating with appropriate 

license authority with respect to the 

musical works it is using for 

promotional and other purposes; and 

(C) The representation is signed by a 

person authorized to make the 

representation on behalf of the service; 

(iv) Upon receipt by the record 

company of written notice from the 

copyright owner of a musical work or 

agent of the copyright owner stating in 

good faith that a particular service is in 

a material manner operating without 

appropriate license authority from such 

copyright owner, the record company 

shall within 5 business days withdraw 

by written notice its authorization of 

such uses of such copyright owner’s 

musical works under the promotional 

royalty rate by that service; 

(v) The interactive streams or limited 

downloads are offered free of any charge 

to the end user and, except in the case 

of interactive streaming subject to 

paragraph (d) of this section in the case 

4534 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

of a free trial period for a digital music 

subscription service, no more than 5 

sound recordings at a time are streamed 

in response to any individual request of 

an end user; 

(vi) The interactive streams and 

limited downloads are offered in a 

manner such that the user is at the same 

time (e.g., on the same Web page) 

presented with a purchase opportunity 

for the relevant sound recording or an 

opportunity to subscribe to a paid 

service offering the sound recording, or 

a link to such a purchase or subscription 

opportunity, except— 

(A) In the case of interactive 

streaming of a sound recording being 

prepared for commercial release but not 

yet released, certain mobile applications 

or other circumstances in which the 

foregoing is impracticable in view of the 

current state of the relevant technology; 

and 

(B) In the case of a free trial period for 

a digital music subscription service, if 

end users are periodically offered an 

opportunity to subscribe to the service 

during such free trial period; and 

(vii) The interactive streams and 

limited downloads are not provided in 

a manner that is likely to cause mistake, 

to confuse or to deceive, reasonable end 

users as to the endorsement or 

association of the author of the musical 

work with any product, service or 

activity other than the sale or paid use 

of sound recordings or paid use of a 

music service through which sound 

recordings are available. Without 

limiting the foregoing, upon receipt of 

written notice from the copyright owner 

of a musical work or agent of the 

copyright owner stating in good faith 

that a particular use of such work under 

this section violates the limitation set 

forth in this paragraph (a)(1)(vii), the 

record company shall promptly cease 

such use of that work, and within 5 

business days withdraw by written 

notice its authorization of such use by 

all relevant third parties it has 

authorized under this section. 

(2) To rely upon the promotional 

royalty rate, a record company making 

or authorizing interactive streams or 

limited downloads shall keep complete 

and accurate contemporaneous written 

records of such uses, including the 

sound recordings and musical works 

involved, the artists, the release dates of 

the sound recordings, a brief statement 

of the promotional activities authorized, 

the identity of the service or services 

where each promotion is authorized 

(including the Internet address if 

applicable), the beginning and end date 

of each period of promotional activity 

authorized, and the representation 

required by paragraph (a)(1)(iii) of this 

section; provided that, in the case of 

trial subscription uses, such records 

shall instead consist of the contractual 

terms that bear upon promotional uses 

by the particular digital music 

subscription services it authorizes; and 

further provided that, if the record 

company itself is conducting the 

promotion, it shall also maintain any 

additional records described in 

paragraph (a)(1)(iii)(A) of this section. 

The records required by this paragraph 

(a)(2) shall be maintained for no less 

time than the record company maintains 

records of usage of royalty-bearing uses 

involving the same type of licensed 

activity in the ordinary course of 

business, but in no event for less than 

5 years from the conclusion of the 

promotional activity to which they 

pertain. If the copyright owner of a 

musical work or its agent requests a 

copy of the information to be 

maintained under this paragraph (a)(2) 

with respect to a specific promotion or 

relating to a particular sound recording 

of a musical work, the record company 

shall provide complete and accurate 

documentation within 10 business days, 

except for any information required 

under paragraph (a)(1)(iii)(A) of this 

section, which shall be provided within 

20 business days, and provided that if 

the copyright owner or agent requests 

information concerning a large volume 

of promotions or sound recordings, the 

record company shall have a reasonable 

time, in view of the amount of 

information requested, to respond to 

any request of such copyright owner or 

agent. If the record company does not 

provide required information within the 

required time, and upon receipt of 

written notice citing such failure does 

not provide such information within a 

further 10 business days, the uses will 

be considered not to be subject to the 

promotional royalty rate and the record 

company (but not any third-party 

service it has authorized) shall be liable 

for any payment due for such uses; 

provided, however, that all rights and 

remedies of the copyright owner with 

respect to unauthorized uses shall be 

preserved. 

(3) If the copyright owner of a musical 

work or its agent requests a copy of the 

information to be maintained under 

paragraph (a)(1)(iii)(A) of this section by 

a service authorized by a record 

company with respect to a specific 

promotion, the service shall provide 

complete and accurate documentation 

within 20 business days, provided that 

if the copyright owner or agent requests 

information concerning a large volume 

of promotions or sound recordings, the 

service shall have a reasonable time, in 

view of the amount of information 

requested, to respond to any request of 

such copyright owner or agent. If the 

service does not provide required 

information within the required time, 

and upon receipt of written notice citing 

such failure does not provide such 

information within a further 10 business 

days, the uses will be considered not to 

be subject to the promotional royalty 

rate and the service (but not the record 

company) will be liable for any payment 

due for such uses; provided, however, 

that all rights and remedies of the 

copyright owner with respect to 

unauthorized uses shall be preserved. 

(4) The promotional royalty rate is 

exclusively for audio-only interactive 

streaming and limited downloads of 

musical works subject to licensing 

under 17 U.S.C. 115. The promotional 

royalty rate does not apply to any other 

use under 17 U.S.C. 115; nor does it 

apply to public performances, 

audiovisual works, lyrics or other uses 

outside the scope of 17 U.S.C. 115. 

Without limitation, uses subject to 

licensing under 17 U.S.C. 115 that do 

not qualify for the promotional royalty 

rate (including without limitation 

interactive streaming or limited 

downloads of a musical work beyond 

the time limitations applicable to the 

promotional royalty rate) require 

payment of applicable royalties. This 

section is based on an understanding of 

industry practices and market 

conditions at the time of its 

development, among other things. The 

terms of this section shall be subject to 

de novo review and consideration (or 

elimination altogether) in future 

proceedings before the Copyright 

Royalty Judges. Nothing in this section 

shall be interpreted or construed in such 

a manner as to nullify or diminish any 

limitation, requirement or obligation of 

17 U.S.C. 115 or other protection for 

musical works afforded by the 

Copyright Act, 17 U.S.C. 101 et seq. For 

the avoidance of doubt, however, except 

as provided in paragraph (a) of this 

section, statements of account under 17 

U.S.C. 115 need not reflect interactive 

streams or limited downloads subject to 

the promotional royalty rate. 

(b) Interactive streaming and limited 

downloads of full-length musical works 

through third-party services. In addition 

to those of paragraph (a) of this section, 

the provisions of this paragraph (b) 

apply to interactive streaming, and 

limited downloads (in the context of a 

free trial period for a digital music 

subscription service), authorized by 

record companies under the 

promotional royalty rate through thirdparty services (including Web sites) that 

is not subject to paragraphs (c) or (d) of 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 4535 

this section. Such interactive streams 

and limited downloads may be made or 

authorized by a record company under 

the promotional royalty rate only if— 

(1) No cash, other monetary payment, 

barter or other consideration for making 

or authorizing the relevant interactive 

streams or limited downloads is 

received by the record company, its 

parent company, any entity owned in 

whole or in part by or under common 

ownership with the record company, or 

any other person or entity acting on 

behalf of or in lieu of the record 

company, except for in-kind 

promotional consideration used to 

promote the sale or paid use of sound 

recordings or the paid use of music 

services through which sound 

recordings are available; 

(2) In the case of interactive streaming 

and limited downloads offered in the 

context of a free trial period for a digital 

music subscription service, the free trial 

period does not exceed 30 consecutive 

days per subscriber per two-year period; 

and 

(3) In contexts other than a free trial 

period for a digital music subscription 

service, interactive streaming subject to 

paragraph (b) of this section of a 

particular sound recording is authorized 

by the record company on no more than 

60 days total for all services (i.e., 

interactive streaming under paragraph 

(b) of this section of a particular sound 

recording may be authorized on no more 

than a total of 60 days, which need not 

be consecutive, and on any one such 

day, interactive streams may be offered 

on one or more services); provided, 

however, that an additional 60 days 

shall be available each time the sound 

recording is re-released by the record 

company in a remastered form or as a 

part of a compilation with a different set 

of sound recordings than the original 

release or any prior compilation 

including such sound recording. 

(4) In the event that a record company 

authorizes promotional uses in excess of 

the time limitations of paragraph (b) of 

this section, the record company, and 

not the third-party service it has 

authorized, shall be liable for any 

payment due for such uses; provided, 

however, that all rights and remedies of 

the copyright owner with respect to 

unauthorized uses shall be preserved. In 

the event that a third-party service 

exceeds the scope of any authorization 

by a record company, the service, and 

not the record company, shall be liable 

for any payment due for such uses; 

provided, however, that all rights and 

remedies of the copyright owner with 

respect to unauthorized uses shall be 

preserved. 

(c) Interactive streaming of full-length 

musical works through record company 

and artist services. In addition to those 

of paragraph (a) of this section, the 

provisions of this paragraph (c) apply to 

interactive streaming conducted or 

authorized by record companies under 

the promotional royalty rate through a 

service (e.g., a Web site) directly owned 

or operated by the record company, or 

directly owned or operated by a 

recording artist under the authorization 

of the record company, and that is not 

subject to paragraph (d) of this section. 

For the avoidance of doubt and without 

limitation, an artist page or site on a 

third-party service (e.g., a social 

networking service) shall not be 

considered a service operated by the 

record company or artist. Such 

interactive streams may be made or 

authorized by a record company under 

the promotional royalty rate only if— 

(1) The interactive streaming subject 

to this paragraph (c) of a particular 

sound recording is offered or authorized 

by the record company on no more than 

90 days total for all services (i.e., 

interactive streaming under this 

paragraph (c) of a particular sound 

recording may be authorized on no more 

than a total of 90 days, which need not 

be consecutive, and on any such day, 

interactive streams may be offered on 

one or more services operated by the 

record company or artist, subject to the 

provisions of paragraph (b)(2) of this 

section); provided, however, that an 

additional 90 days shall be available 

each time the sound recording is rereleased by the record company in a 

remastered form or as part of a 

compilation with a different set of 

sound recordings than prior 

compilations that include that sound 

recording; 

(2) In the case of interactive streaming 

through a service devoted to one 

featured artist, the interactive streams 

subject to this paragraph (c) of this 

section of a particular sound recording 

are made or authorized by the record 

company on no more than one official 

artist site per artist and are recordings 

of that artist; and 

(3) In the case of interactive streaming 

through a service that is not limited to 

a single featured artist, all interactive 

streaming on such service (whether 

eligible for the promotional royalty rate 

or not) is limited to sound recordings of 

a single record company and its 

affiliates and the service would not 

reasonably be considered to be a 

meaningful substitute for a paid music 

service. 

(d) Interactive streaming of clips. In 

addition to those in paragraph (a) of this 

section, the provisions of this paragraph 

(d) apply to interactive streaming 

conducted or authorized by record 

companies under the promotional 

royalty rate of segments of sound 

recordings of musical works with a 

playing time that does not exceed the 

greater of: 

(1) 30 seconds, or 

(2) 10% of the playing time of the 

complete sound recording, but in no 

event in excess of 60 seconds. Such 

interactive streams may be made or 

authorized by a record company under 

the promotional royalty rate without 

any of the temporal limitations set forth 

in paragraphs (b) and (c) of this section 

(but subject to the other conditions of 

paragraphs (b) and (c) of this section, as 

applicable). For clarity, this paragraph 

(d) is strictly limited to the uses 

described herein and shall not be 

construed as permitting the creation or 

use of an excerpt of a musical work in 

violation of 17 U.S.C. 106(2) or 115(a)(2) 

or any other right of a musical work 

owner. 

(e) Activities prior to the publication 

date. Notwithstanding paragraphs (a) 

through (d) of this section, in the case 

of licensed activity prior to the 

publication date, the promotional 

royalty rate shall apply to promotional 

interactive streams, and to limited 

downloads offered in the context of a 

free trial period for a digital music 

subscription service, that in either case 

are authorized by the relevant record 

company, if the condition set forth in 

paragraph (a)(1)(i) of this section is 

satisfied, subject only to the additional 

condition in paragraph (b)(1) of this 

section, and provided that a free trial 

period for a digital music subscription 

service authorized by the relevant 

record company shall be considered to 

be of 30 days’ duration. In the event of 

a dispute concerning the eligibility of 

licensed activity prior to the publication 

date for the promotional royalty rate, a 

service asserting that its licensed 

activity is eligible for the promotional 

royalty rate shall bear the burden of 

proving that its licensed activity was 

authorized by the relevant record 

company and shall certify that the 

condition in paragraph (b)(1) of this 

section was satisfied. 

§ 385.15 Timing of payments. 

Payment for any accounting period for 

which payment otherwise would be due 

more than 180 days after the publication 

date shall be due as otherwise provided 

under 17 U.S.C. 115 and its 

implementing regulations. Payment for 

any prior accounting period shall be due 

180 days after the publication date. 

4536 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules and Regulations 

§ 385.16 Reproduction and distribution 

rights covered. 

A compulsory license under 17 U.S.C. 

115 extends to all reproduction and 

distribution rights that may be necessary 

for the provision of the licensed activity, 

solely for the purpose of providing such 

licensed activity (and no other purpose). 

§ 385.17 Effect of rates. 

In any future proceedings under 17 

U.S.C. 115(c)(3)(C) and (D), the royalty 

rates payable for a compulsory license 

shall be established de novo. 

Dated: November 24, 2008. 

James Scott Sledge, 

Chief, U.S. Copyright Royalty Judge. 

[FR Doc. E9–1443 Filed 1–23–09; 8:45 am] 

BILLING CODE 1410–10–P