Opinion ID: 2314971
Heading Depth: 3
Heading Rank: 1

Heading: The appropriate revenue base

Text: The District Court used as a revenue base the wholesale price for the musical content, MobiTV, 712 F.Supp.2d at 247. At first glance, this phrase might seem to involve circular reasoning: the revenue base is being selected to determine what Mobi must pay ASCAP for the right to perform ASCAP music, but what Mobi must pay ASCAP might also be called the wholesale price for the musical content. But, as used by the District Court, that is not what the phrase means. In fact, the phrase has two other meanings depending on whether Mobi is licensing content from content providers (typically television networks) or obtaining music videos from record labels. The Court explained its revenue base in these words: For the programming that Mobi licenses from content providers, aggregates, and conveys to wireless carriers, the revenue base shall be the amounts that Mobi pays to the cable television networks or other providers to license the content, plus any revenue from advertising Mobi inserts into that programming, including revenue that is shared with wireless carriers or potentially content suppliers. For the music videos that Mobi obtains from record labels, programs into music video channels, and then provides to the carriers, the revenue base will be the revenue that Mobi receives from the wireless carriers for this programming, plus any revenue from advertising Mobi inserts into that programming, including revenue that is shared with wireless carriers or potentially content providers. Id. (emphases added). As can readily be seen, both revenue bases use wholesale revenue, in one case the wholesale revenue that the cable television networks receive from Mobi and in the other case the wholesale revenue that Mobi receives from the wireless carriers. In neither case is retail revenue used, i.e., the revenue the wireless carriers receive from the handset customers. At the outset, we can put aside one aspect of ASCAP's challenge, which is merely a semantic quibble. ASCAP repeatedly faults the District Court for using Mobi's cost or costs to obtain rights, see Brief for Appellants at 30, 33. The District Court focused on revenue, either the content providers' revenue from Mobi or Mobi's own revenue from record labels. Obviously, with respect to programming from content providers, the providers' revenue from Mobi is the same as Mobi's payment of costs to those providers. The labeling is a matter of perspective, not substance. ASCAP's fundamental objection is that the revenue base should have been retail revenue received downstream in the distribution chain by the wireless carriers from their customers, rather than the wholesale revenue received upstream by the content providers from Mobi. We consider first the adequacy of the District Court's reasons for using the content providers' revenue and then ASCAP's complaint, which is based primarily on this Court's decision in Music Choice II. The District Court's reasons for using wholesale revenues. The District Court expressed several reasons for using wholesale revenues as the appropriate revenue base from which to measure the value of the public performance of the music at issue here. MobiTV, 712 F.Supp.2d at 246. First, the Court explained that [p]ricing the public performance right at the time the content is first sold gives direct and immediate feedback to content producers about the value of a component of their product. Id. Second, the Court accepted the concept of what Mobi's expert, Professor Roger G. Noll, called derived demand: [11] Mobi has shown that the value of the public performance of the music at the retail level is indeed captured at the wholesale level, not just theoretically by the concept of derived demand, but also functionally from the fact that the cable television networks principally generate their revenues by measuring the number of subscribers for their programming. To the extent that a channel's content becomes popular among consumers, the seller of content demands a higher rate of compensation from advertisers and from purchasers of the content. And, Mobi's payments to the cable television networks for the programming it distributes are driven by the subscriber data that Mobi tracks and conveys to the networks. Id. Third, the District Court pointed out the administrative advantages of using wholesale revenue: [T]he administrative advantages of basing a rate on wholesale revenue are amply illustrated in this case by the challenges that ASCAP's expert sought to surmount as she endeavored to construct calculations that might result in a reasonable fee and to justify those calculations. Fully appreciating that the retail revenue base vastly overstates the value of the public performance of the musical composition, since it reflects so many inputs that bear little or no relation to that content, she designed layers of formulae to reduce the retail revenue base. At each step of the process, those formulae raised a multitude of questions about their intellectual rigor, fairness, and the cost and burden associated with their implementation. Id. Fourth, the District Court relied on two factors that our Court in Music Choice II had pointed out counsel against using retail revenues as a revenue base: This is a case in which many of the retail customers pay a single fee for a bundle of programming, making it difficult to determine what part of the fees is paid for music. Music Choice II, 326 [316] F.3d at 195 n. 2. And the digital revolution, which has turned handsets into computers and permitted television programming to be included among the many innovative products to which a consumer has immediate and constant access, makes it an extremely complex task to tease out one component of the retail price and identify the extent to which retail price is driven by the musical content of the television programming. Id. at 196 n. 3. MobiTV, 712 F.Supp.2d at 246-47. ASCAP challenges the District Court's reasons for using wholesale revenues as the royalty base by disputing the validity of Prof. Noll's use of the principle of derived demand. See Brief for Appellant at 33-36. Prof. Noll justified his use of that principle, which the District Court accepted, in these words: If consumers value musical performances more highly, they will increase their purchases of musical performances, which in turn will cause the derived demand for content that contains music to increase. The resulting increase in sales of content that contains music will lead to higher payments for rights holders even if the royalty rate is unchanged. Noll Declaration 45. He gave three reasons for using wholesale revenue as the appropriate base: First, using the revenue of the channel supplier leads to royalties that are most closely connected to the intensity of music use. Second, basing royalties on the revenue of the channel supplier also avoids unreliable and expensive methods for allocating revenue among bundled products and services and to other inputs of retailers (here, the wireless carriers). Third, the revenue of channel suppliers includes sources of revenue that accrue to the channel but not to the retailer, such as advertising that is inserted by the channel supplier. Id. at 48. Despite cross-examining Prof. Noll in 120 pages of trial transcript, ASCAP failed to provide the District Court with any basis for discounting, much less rejecting, his analysis. ASCAP's challenge to wholesale revenues based on Music Choice II and IV. The Music Choice litigation, see Music Choice II, 316 F.3d 189, and United States v. Broadcast Music, Inc. (Application of Music Choice), 426 F.3d 91 (2d Cir.2005) ( Music Choice IV ), concerned the appropriate royalty rate to be paid by Music Choice to Broadcast Music, Inc. (BMI), for a TTTA license for the performance rights to music in BMI's repertory. Music Choice is a partnership that transmits numerous music channels to listeners' television sets via cable and satellite and to their computers via the Internet. Like ASCAP, BMI is subject to a consent decree that designates the Southern District of New York as the rate court in the event of a royalty fee dispute. Music Choice II, 316 F.3d at 190. BMI urged the Court to follow an agreement between BMI and DMX, a competitor of Music Choice. Under that agreement, DMX paid BMI 3.75 percent (later 4 percent) of DMX's wholesale revenue, which in this context meant the money paid by the cable or satellite operators to DMX for music programming. See id. at 192. That rate was designed to be approximately double the rate previously applied to the retail revenues of the cable or satellite operators on the theory that these operators charged their retail customers approximately double what they were paying to the providers of the music programming. See id. The District Court in the Music Choice litigation ruled that a 3.75 percent rate based on the wholesale revenues of Music Choice was not appropriate. See id. at 193. The District Court explained that this rate had been used in the DMX contracts to approximate the use in previous contracts of a 2 percent rate of DMX's wholesale revenues plus 2 percent of the cable or satellite operators' retail revenues. Then the District Court reasoned that retail revenues did not reflect the fair market value of music because the subscriber paying the retail price was paying for materials and services not provided by the author of the music. See id. at 194. The Court therefore deducted 2 percentage points (the retail rate) from the 3.75 percent that had been applied to wholesale revenues and set 1.75 percent of wholesale revenues as the appropriate rate. See id. This Court reversed. We faulted the District Court for rejecting retail revenues in determining an appropriate rate. See id. at 195. In language embraced by ASCAP in the pending case, we said: As to the court's rejection of retail revenues, absent some valid reason for using a different measure, what retail customers pay to receive the product or service in question (in this case, the recorded music) seems to us to be an excellent indicator of its fair market value. While in some instances there may be reason to approximate fair market value on the basis of something other than the prices paid by consumers, in the absence of factors suggesting a different measure the price willing buyers and sellers agree upon in arm's length transactions appears to be the best measure. It is true without doubt that to make the music available to its customers, the retail seller must incur expenses for various processes and services not provided by the owner of the music, such as the laying of cable, the establishment of satellite systems, etc. However, this is in no way incompatible with the proposition that retail revenues derived from the sale of music fairly measure the value of the music. The customer pays the retail price because the customer wants the music, not because the customer wants to finance the laying of cable or the launching of satellites. Id. (citation and footnote omitted). In the pending case, we are of course obliged to follow the holding of Music Choice II, which was that the District Court had erred by reducing a percentage rate that had been applied to wholesale revenues by the rate previously applied to retail revenues. Nothing of that sort occurred in our case. Of course, ASCAP urges us to heed not merely the holding of Music Choice II but its language, particularly the observation that what retail customers pay to receive the product of service in question (in this case, the recorded music) seems to us to be an excellent indicator of its fair market value. For several reasons we conclude that the quoted words do not compel a reversal of the District Court's decision in this case. First, the quoted words were preceded by the important qualifying phrase absent some valid reason for using a different measure. In the pending case, the District Court had a very valid reason for using a different measure: the unimpeached testimony of Prof. Noll explaining several reasons why wholesale revenue was far superior to retail revenue as a basis for a royalty rate in this case. Second, in Music Choice II our Court added a significant footnote, observing that where the customers pay a single fee for a package of audio and visual programming, which includes the music, it will be difficult to determine what part of the fees paid was for the music, as opposed to other programming. Id. at 195 n. 2. That is precisely the sort of bundling that occurs with Mobi's transmission of programming to wireless carriers. The wireless carriers typically offer Mobi's television products as part of a bundle of services that also includes Internet access and text messaging, and then charge a single data plan fee for the whole bundle. As ASCAP's fee proposal to the District Court illustrated, separating out the relative value of each individual product is fraught with methodological difficulty. ASCAP's proposal was premised on the notion that the value of different products in the bundle could be determined based upon how much data each product used. As the District Court noted, this proposal made the essentially arbitrary assumption that a consumer would pay the same amount of money to receive a kilobyte of text messaging as a kilobyte of television programming, even though a kilobyte might give a consumer several back-and-forth exchanges of text messages but only the briefest glimpse of an image from a television program. MobiTV, 712 F.Supp.2d at 241. ASCAP's failure to develop a rational formula for valuing the component parts in the bundle of products sold by the wireless carriers confirms the wisdom of the District Court's decision to reject the use of a retail base in this case. The products bundled by Mobi differed considerably from the programming channels in Music Choice II, which were essentially audio channels devoted exclusively to music. Third, although not disagreeing with the holding of Music Choice II, we are not persuaded that its contention that retail revenues derived from the sale of the music fairly measure the value of the music, id. at 195, is universally true. Indeed, an example offered in that opinion seems to undermine that assertion. The example concerned purchasers of music on a compact disc sold for $12. Music Choice II noted that the purchasers were not motivated to spend their money to pay the salaries of truck drivers, warehousemen, bookkeepers, office administrators, salespersons and executives, all of whom played necessary roles in bringing the record to market. What the customers wanted was a record of certain music, and they were willing to pay $12 to get it. Id. (emphasis added). At an earlier time, the customer who wanted to hear the music in that example had a choice between a then-novel compact disc and an old-fashioned vinyl plastic record, which (unless it had value as a rarity) would have sold for considerably less than the $12 for the CD. True, the purchaser was not motivated to pay the salaries of all the personnel whose efforts made possible the production and delivery of the CD (or the vinyl record), but preference for a CD would have resulted in payment of a higher price than for a record, even though both contained the same music. The retail price of the CD was reflecting not just the value the purchaser assigned to the music but also the value assigned to the mode of delivery of that music. In another significant footnote, Music Choice II acknowledged this very fact: If it were demonstrated that retail purchasers were motivated to pay more because of advantages that resulted from a particular mode of delivery, such as better quality, better accessability or whatever, this might justify a conclusion that retail price of the service purchased by the customer exceeded the fair market value of the music. Id. at 196 n. 3. Whether or not in some contexts the retail price of a product containing music is a good measure of the fair market value of the music, the District Court in the pending case, on the record before it, did not err in concluding that the retail price paid by customers for a service that delivers video and audio channels containing music to their handsets is not a good measure of the value of the music itself. [12] ASCAP's challenge to wholesale revenues based on uncompensated rights. ASCAP also faults the District Court's use of wholesale revenues because such use fails to provide any compensation to ASCAP in the few instances where Mobi acquired programming without paying anything to content providers. Prof. Noll recognized that this would occur in some instances because a new channel trying to get established sometimes cannot command any price, and providers of such content would rather offer it for free in order to have it included in a package of bundled content. He explained, however, that such a channel would either disappear for lack of an audience or achieve an audience, in which event the popularity of its programming would subsequently be reflected in the later revenues that content providers could demand, thereby increasing ASCAP's royalty for the benefit of the music composers. See Trial Tr. 985-88. Either way, the temporary use of free content would not undermine the overall reasonableness of the District Court's royalty determination. As the District Court explained, The market for television content has spoken, and this content would receive no airing at all through a wireless distribution platform unless the content were provided for free and given the opportunity to build a base. 712 F.Supp.2d at 251.