Opinion ID: 2762941
Heading Depth: 3
Heading Rank: 1

Heading: Setting the SDARS Rate

Text: At the time of the proceeding, the current SDARS rate was 8% of gross revenues, established by the Judges in the last preceding ratemaking and affirmed by this court against challenge by SoundExchange. SoundExchange, 571 F.3d at 1223–25. In the current proceeding, SoundExchange proposed rates beginning at 12% in 2013, rising to 20% in 2017. Sirius XM, the only satellite provider currently subject to the rate, proposed rates in the 5% to 7% range. Final Determination, 78 Fed. Reg. at 23,061. In proceedings to determine rates for the digital performance of sound recordings, the parties unsurprisingly introduced evidence of royalty agreements covering analogous services such as webcasting, interactive subscription rates, or non-preexisting, noninteractive services. Sirius XM supported its rate proposal with evidence of direct license agreements between Sirius XM and independent record labels for the performance of sound recordings. Final Determination, 78 Fed. Reg. at 23,061–62. SoundExchange based its rate proposal on its expert witness’s analysis of interactive streaming agreements. Interactive services, in contrast to satellite radio and preexisting subscription services, allow an end user to hear a particular song on demand, and do not benefit from a compulsory license. See 17 U.S.C. §§ 114(d)(2)–(3); H.R. Rep. No. 105-796, at 87–88 (Conf. Rep.). SoundExchange’s 7 expert witness, Dr. Janusz Ordover, examined “seven market agreements for digital music between certain interactive subscription services that stream music over the Internet and each of the four major record labels” which included royalty rates ranging from 50% to 70%. Final Determination, 78 Fed. Reg. at 23,062. Ordover then adjusted these rates to account for “the fact that the Sirius XM satellite radio service . . . transmits both music and non-music content,” as well as the differences between satellite radio and interactive subscription services. Id. at 23,063. These adjustments yielded a rate of 22.23%. Id. The Judges found Sirius XM’s direct license agreements to be comparable to a degree, but after identifying certain weaknesses, concluded that the top range of those benchmarks (7%) set the lower bound of reasonable rates. Id. at 23,063–65. The Judges found SoundExchange’s benchmarks less helpful. They were not persuaded that Dr. Ordover properly accounted for the differences between the benchmark agreements and the rights and parties at issue in the SDARS proceeding. They were also concerned by the “yawning gap,” id. at 23,066, between the current SDARS rate and the interactive services benchmarks. The Judges concluded that SoundExchange’s adjusted benchmark of 22.23% “can be viewed as no more than the upper bound of the zone of reasonableness, although it is a bound that the Judges have little confidence in.” Id. Left with a large divide between Sirius XM’s 7% and SoundExchange’s 22.23%, the Judges considered three interim “guideposts” to help determine the reasonable rate. The Judges looked at SoundExchange’s proposed statutory SDARS rates, which began at 12%; the prevailing SDARS rate of 8%; and the unadjusted benchmark rate of 13% determined in the prior round of ratemaking. The Judges then 8 analyzed the parties’ benchmarks and the interim guideposts in light of the Section 801(b) factors. The Judges found a downward adjustment appropriate to account for Sirius XM’s investment in satellite infrastructure. Id. at 23,068–71. Based on this analysis, the Judges arrived at an SDARS rate of 11%. In order to avoid disruption, the Judges adopted a staggered schedule beginning at 9% in 2013 and increasing by .5% annually until achievement of 11% in 2017. Id. at 23,071.