Digital Performance Right in Sound Recordings and Ephemeral Recordings, 24084-24114 [E7-8128]
Agencies
[Federal Register Volume 72, Number 83 (Tuesday, May 1, 2007)] [Rules and Regulations] [Pages 24084-24114] From the Federal Register Online via the Government Printing Office [www.gpo.gov] [FR Doc No: E7-8128] [[Page 24083]] ----------------------------------------------------------------------- Part VI Library of Congress ----------------------------------------------------------------------- Copyright Royalty Board ----------------------------------------------------------------------- 37 CFR Part 380 Digital Performance Right in Sound Recordings and Ephemeral Recordings; Final Rule Federal Register / Vol. 72, No. 83 / Tuesday May 1, 2007 / Rules and Regulations [[Page 24084]] ----------------------------------------------------------------------- LIBRARY OF CONGRESS Copyright Royalty Board 37 CFR Part 380 [Docket No. 2005-1 CRB DTRA] Digital Performance Right in Sound Recordings and Ephemeral Recordings AGENCY: Copyright Royalty Board, Library of Congress. ACTION: Final rule and order. ----------------------------------------------------------------------- SUMMARY: The Copyright Royalty Judges, on behalf of the Copyright Royalty Board of the Library of Congress, are announcing their final determination of the rates and terms for two statutory licenses, permitting certain digital performances of sound recordings and the making of ephemeral recordings, for the period beginning January 1, 2006, and ending on December 31, 2010. DATES: Effective date: May 1, 2007. Applicability date: The regulations apply to the license period January 1, 2006 through December 31, 2010. ADDRESSES: The final determination is also posted on the Copyright Royalty Board Web site at https://www.loc.gov/crb/proceedings/2005-1/final-rates-terms2005-1.pdf. FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658. Telefax: (202) 252-3423. SUPPLEMENTARY INFORMATION: I. Introduction A. Subject of the Proceeding This is a rate determination proceeding convened under 17 U.S.C. 803(b) et seq. and 37 CFR 351 et seq., in accord with the Copyright Royalty Judges' Notice announcing commencement of proceeding, with a request for Petitions to Participate in a proceeding to determine the rates and terms for a digital public performance of sound recordings by means of an eligible nonsubscription transmission or a transmission made by a new subscription service under section 114 of the Copyright Act, as amended by the Digital Millennium Copyright Act (``DMCA''), and for the making of ephemeral copies in furtherance of these digital public performances under section 112, as created by the DMCA, published at 70 FR 7970 (February 16, 2005). The rates and terms set in this proceeding apply to the period of January 1, 2006 through December 31, 2010. 17 U.S.C. 804(b)(3)(A). B. Parties to the Proceeding The parties to this proceeding are: (i) Digital Media Association and certain of its member companies that participated in this proceeding, namely: America Online, Inc. (``AOL''), Yahoo!, Inc. (``Yahoo!''), Microsoft, Inc. (``Microsoft''), and Live365, Inc. (``Live365'') (collectively referred to as ``DiMA''); (ii) ``Radio Broadcasters'' (this designation was adopted by the parties): namely, Bonneville International Corp., Clear Channel Communications, Inc., National Religious Broadcasters Music License Committee (``NRBMLC''), Susquehanna Radio Corp.; (iii) SBR Creative Media, Inc. (``SBR'') and the ``Small Commercial Webcasters'' (this designation was adopted by the parties): namely, AccuRadio, LLC, Digitally Imported, Inc., Radioio.com LLC, Discombobulated, LLC, 3WK, LLC, Radio Paradise, Inc.; (iv) National Public Radio, Inc. (``NPR''), Corporation for Public Broadcasting-Qualified Stations (``CPB''), National Religious Broadcasters Noncommercial Music License Committee (``NRBNMLC''), Collegiate Broadcasters, Inc. (``CBI''), Intercollegiate Broadcasting System, Inc., (``IBS''), and Harvard Radio Broadcasting, Inc. (``WHRB''); (v) Royalty Logic, Inc. (``RLI''); and (vi) SoundExchange, Inc. (``SoundExchange''). DiMA, Radio Broadcasters, Small Commercial Webcasters, SBR, NPR, CPB, NRBNMLC, CBI, IBS and WHRB are sometimes referred to collectively as ``the Services.'' The Services are Internet webcasters or broadcast radio simulcasters that each employ a technology known as streaming, but comprise a range of different business models and music programming. DiMA and certain of its member companies that participated in the proceeding (namely: AOL, Yahoo!, Microsoft and Live365), Radio Broadcasters, SBR and Small Commercial Webcasters are sometimes referred to collectively as ``Commercial Webcasters.'' NPR, CPB, NRBNMLC, CBI, IBS and WHRB are sometimes referred to collectively as ``Noncommercial Webcasters.'' II. The Proceedings A. Pre-Hearing Proceedings A notice calling for the filing of Petitions to Participate in this proceeding to set the rates and terms for the period beginning January 1, 2006, and ending on December 31, 2010, was published February 16, 2005. 70 FR 7970. The Petitions were due by March 18, 2005. Forty-two petitions were filed. Following an order to file a Notice of Intention to Submit Written Direct Statements, the participants were reduced to the following twenty eight: SBR; NPR; NPR Member Stations; CPB; CBI; SoundExchange; RLI; IBS; WHRB; Digital Media Association; AOL; Live365; Microsoft; Yahoo!; AccuRadio LLC; Discombobulated LLC; Digitally Imported, Inc.; Radioio.com LLC; Radio Paradise, Inc.; Educational Media Foundation; NRBNMLC; Bonneville International Corp.; Clear Channel Communications, Inc.; CBS Radio, Inc.; NRBMLC; Salem Communications Corp.; Susquehanna Radio Corp.; and Beethoven.com LLC. Following an unsuccessful negotiation period, the Written Direct Statements were due October 31, 2005. All of the above filed plus the additional following: Mvyradio.com LLC; 3WK; XM Satellite Radio, Inc.; Sirius Satellite, Inc.; Infinity Broadcasting Corp. B. The Direct Cases The participants conducted discovery and then began live testimony. By the time testimony began, the participants reduced to the following: SBR; NPR; NPR Member Stations; CPB; CBI; SoundExchange; RLI; IBS; WHRB; Digital Media Association; AOL; Yahoo!; AccuRadio LLC; Discombobulated LLC; Digitally Imported, Inc.; Mvyradio.com LLC; Radioio.com LLC; Radio Paradise, Inc.; 3WK LLC; Educational Media Foundation; NRBNMLC; Bonneville International Corp.; Clear Channel Communications, Inc.; NRBMLC; and Susquehanna Radio Corp. Testimony was taken from May 1, 2005, through August 7, 2006. SoundExchange presented the testimony of the following 14 witnesses: (1) John Simson, SoundExchange, executive director; (2) Barrie Kessler, SoundExchange, chief operating officer; (3) James Griffin, One House LLC, chief executive officer; (4) Erik Brynjolfsson, MIT Sloan School of Management, professor of management and director of Center for eBusiness at MIT; (5) Michael Pelcovits, MiCRA, economic consultant; (6) Mark Eisenberg, SONY BMG, senior vice president of business and legal affairs; (7) Lawrence Kenswil, Universal eLabs, a division of Universal Music Group, president; (8) Michael Kushner, Atlantic Records Group, business and legal affairs; (9) Stephen Bryan, Warner Music Group, vice president of strategic planning and business development; (10) Harold Bradley, American Federation of Musicians of United States and Canada, vice president; (11) Jonatha Brooke, songwriter and performer, owner of Bad Dog Records; (12) Cathy Fink, songwriter and performer; (13) Bruce Iglauer, Alligator [[Page 24085]] Records, an independent blues label, founder; and (14) Mark Ghuneim, Wiredset, LLC, chief executive officer. Royalty Logic, Inc. presented the testimony of Ronald A. Gertz, president. The Services presented the testimony of the following 24 witnesses: Digital Media Association and its Member Companies: (1) Adam B. Jaffe, Brandeis University, professor in economics; (2) Christine Winston, America Online, executive director of programming strategy and planning; (3) David Porter, Live365, general manager of business development; (4) Jonathan Potter, DiMA, executive director; (5) N. Mark Lam, Live365, chairman and chief executive officer; (6) Robert D. Roback, Yahoo! Music, general manager; (7) J. Donald Fancher, Deloitte and Touche Financial Advisory Services LLP; (8) Jay Frank, Yahoo!, programming and label relations; (9) Fred Silber, Microsoft, business development manager for MSN; (10) Eric Ronning, Ronning Lipset Radio; (11) Jack Isquith, American Online Music, executive director Music Industry Relations; (12) Karyn Ulman, Music Reports, Inc.; Radio Broadcasters: (13) Dan Halyburton, Susquehanna Radio, research, engineering and programming; (14) Roger Coryell, San Francisco Bonneville Radio Group, director strategic marketing and Internet; (15) Russell Hauth, National Radio Broadcasters Music Licensing Committee, executive director; (16) Brian Parsons, Clear Channel Radio, vice president of technology; Small Commercial Webcasters: (17) Kurt Hanson, AccuRadio, president and RAIN newsletter, publisher; National Public Radio: (18) Kenneth Stern, NPR, chief executive officer; Intercollegiate Broadcasting System, Inc. and Harvard Radio Broadcasting Co., Inc.: (19) Frederick J. Kass, Jr., IBS, chief operating officer; (20) Michael Papish, HRBC, treasurer and Media Unbound, president; Collegiate Broadcasters, Inc.: (21) William Robedee, CBI, past chair and KTRU, Rice University, manager; (22) Joel R. Willer, KXUL, University of Louisiana, Monroe, faculty advisor; National Religious Broadcasters Noncommercial Music Licensing Committee: (23) Eric Johnson, NRBNMLC, board member and CDR Radio Network, music director; and SBR Creative Media, Inc.: (24) David Rahn, president. C. The Rebuttal Cases The participants filed Written Rebuttal Statements on September 29, 2006. Discovery was then conducted on the rebuttal evidence. Rebuttal testimony was taken from November 6 through November 30, 2006. SoundExchange presented the testimony of the following nine witnesses: (1) Barrie Kessler, SoundExchange, chief operating officer; (2) James Griffin, One House LLC, chief executive officer; (3) Erik Brynjolfsson, MIT Sloan School of Management, professor of management and director of Center for eBusiness at MIT; (4) Michael Pelcovits, MiCRA, economic consultant; (5) Mark Eisenberg, SONY BMG, senior vice president of business and legal affairs; (6) Thomas Lee, American Federation of Musicians, president; (7) Simon Wheeler, Association of Independent Music, chair of New Media Committee; (8) Charles Ciongoli, Universal Music Group, North American, executive vice president and chief financial officer; and (9) Tom Rowland, Universal Music Enterprises, senior vice president, film and television music; Royalty Logic, Inc. presented the testimony of the following two witnesses: (1) Ronald A. Gertz, president; and (2) Peter Paterno, entertainment attorney; The Services presented the testimony of the following 16 witnesses: Digital Media Association and its Member Companies: (1) Adam B. Jaffe, Brandeis University, professor in economics; (2) Christine Winston, America Online, executive director of programming strategy and planning; (3) N. Mark Lam, Live365, chairman and chief executive officer; (4) Robert D. Roback, Yahoo! Music, general manager; (5) J. Donald Fancher, Deloitte and Touche Financial Advisory Services LLP; (6) Jay Frank, Yahoo!, programming and label relations; (7) Jack Isquith, American Online Music, executive director Music Industry Relations; (8) Roger James Nebel, FTI Consulting; Radio Broadcasters: (9) Keith Meehan, Radio Music Licensing Committee, executive director; (10) Eugene Levin, Radio Music Licensing Committee, controller; (11) Brian Parsons, Clear Channel Radio, vice president of technology; (12) Adam B. Jaffe, Brandeis University, professor of economics; National Public Radio: (13) Adam B. Jaffe, Brandeis University, professor of economics; Intercollegiate Broadcasting System, Inc. and Harvard Radio Broadcasting Co., Inc.: (14) Jerome Picard, economics professor (ret.); (15) Michael Papish, HRBC, treasurer; and National Religious Broadcasters Noncommercial Music Licensing Committee: (16) Eric Johnson, member of board. At the close of all the evidence, the record was closed. In addition to the written direct statements and written rebuttal statements, the Copyright Royalty Judges heard 48 days of testimony, which filled 13,288 pages of transcript, and 192 exhibits were admitted. The docket contains 475 entries of pleadings, motions and orders. D. Post-Hearing Submissions and Arguments After the evidentiary phase of the proceeding, the participants were ordered to file Proposed Findings of Fact and Conclusions of Law on December 12, 2006, and Responses to those proposals on December 15, 2006. The parties were also ordered to submit Stipulated Terms on December 15, 2006, but none have been filed. Closing arguments were heard on December 21, 2006. Then the matter was submitted to the Copyright Royalty Judges for a Determination.\1\ --------------------------------------------------------------------------- \1\ Hereinafter, references to written direct testimony shall be cited as ``WDT'' preceded by the last name of the witness and followed by the page number. References to written rebuttal testimony shall be cited as ``WRT'' preceded by the last name of the witness and followed by the page number. References to the transcript record shall be cited as ``Tr.'' preceded by the date and followed by the page number and the last name of the witness. References to proposed findings of fact and conclusions of law shall be cited as ``PFF'' or ``PCL,'' respectively, preceded by the name of the party that submitted same and followed by the paragraph number. References to reply proposed findings of fact and conclusions of law shall be cited as ``RFF'' or ``RCL,'' respectively, preceded by the name of the party and followed by the paragraph number. --------------------------------------------------------------------------- On March 2, 2007, the Copyright Royalty Judges issued the initial Determination of Rates and Terms. Pursuant to 17 U.S.C. 803(c)(2) and 37 CFR Part 353, the parties filed Motions for Rehearing.\2\ The Judges requested the parties to respond to the motions filed, in order to know the positions of each party on each of the issues raised in the motions, and ordered the parties to file written arguments in support of each motion. The parties filed responses and written arguments. Having reviewed all motions, written arguments and responses, the Judges denied all the motions for rehearing. Order Denying Motions for Rehearing, In the Matter of Digital Performance Right in Sound Recordings and Ephemeral Recordings, Docket No. 2005-1 CRB DTRA (April 16, 2007). As reviewed in the said Order, none of the grounds in the motions presented the type of exceptional case where the Determination is not supported by the [[Page 24086]] evidence, is erroneous, is contrary to legal requirements, or justifies the introduction of new evidence. 17 U.S.C. 803(c)(2)(A); 37 CFR 353.1 and 353.2. The motions did not meet the required standards set by statute, by regulation and by case law. Nevertheless, the Judges were persuaded to clarify two issues raised by the parties. This Final Determination includes a transition phase for 2006 and 2007 to use Aggregate Tuning Hours (``ATH'') to estimate usage as permitted under the prior fee regime. This limited use of an ATH calculation option should facilitate a smooth transition to the fee structure adopted in this Final Determination. Next, the regulations are corrected to refer to ``digital audio transmissions'' in place of the phrase ``Internet transmissions.'' III. The Statutory Criteria for Setting Rates and Terms --------------------------------------------------------------------------- \2\ Motions were filed by DiMA, IBS, WHRB, NPR, Radio Broadcasters, RLI, Small Commercial Webcasters, SoundExchange and CBI. --------------------------------------------------------------------------- A. The Statutory Background 1. Music Copyright Law in General Section 102 of the Copyright Act of 1976 (the ``Copyright Act'') identifies various categories of works that are eligible for copyright protection. 17 U.S.C. 102. These include ``musical works'' and ``sound recordings.'' Id. at 102(2) and 102(7). The term ``musical work'' refers to the notes and lyrics of a song, while a ``sound recording'' results from ``the fixation of a series of musical, spoken, or other sounds.'' Id. at 101. A song that is sung and recorded will constitute a sound recording by the entity that records the performance, and a musical work by the songwriter. Another performer may record the same song and that performance will result in another sound recording, but the musical work remains with the songwriter. Under these facts, there are two sound recordings and one musical work as a result of the two recordings of the same song. Typically, a record label owns the copyright in a sound recording and a music publisher owns the copyright in a musical work. 5/4/06 Tr. 24:11-27:16 (Simson). Under the 1976 Copyright Act, a copyright owner receives a bundle of exclusive rights set forth in section 106. 17 U.S.C. 106. Among them is the right to make or authorize the performance to the public of a copyrighted work. The performance right is granted to all categories of copyrighted works with one exception: Sound recordings. Thus, while the owner of a musical work enjoys the performance right, the owner of a sound recording does not.\3\ Congress did not begin to address this inequality until the end of the twentieth century. --------------------------------------------------------------------------- \3\ Indeed, copyright owners of musical works have enjoyed the performance right since the nineteenth century. --------------------------------------------------------------------------- 2. The DPRA In 1995, Congress enacted the Digital Performance Right in Sound Recordings Act (``DPRA''), Public Law 104-39, 109 Stat. 336 (1995), which added a new section 106(6) to the Copyright Act. That provision grants copyright owners of sound recordings a limited performance right to make or authorize the performance of their works ``by means of a digital audio transmission.'' 17 U.S.C. 106(6). Often referred to as the ``digital performance right,'' the right was further limited by the creation of a statutory license for certain nonexempt, noninteractive subscription services and preexisting satellite digital audio radio services. 17 U.S.C. 114. The statutory license permits these services, upon compliance with certain statutory conditions, to make those transmissions without obtaining consent from, or having to negotiate license fees with, copyright owners of the sound recordings they perform. Id. Congress established procedures to facilitate voluntary negotiation of rates and terms including a provision authorizing copyright owners and services to designate common agents on a nonexclusive basis to negotiate licenses--as well as to pay, to collect, and to distribute royalties-- and a provision granting antitrust immunity for such actions. Id. Absent agreement among all the interested parties, the Librarian of Congress was directed to convene a Copyright Arbitration Royalty Panel (``CARP'') to recommend royalty rates and terms. Congress directed the CARP to set a royalty rate for the subscription services' statutory license that achieves the policy objectives in section 801(b)(1) of the Copyright Act. Id. Under the DPRA, copyright owners must allocate one-half of the statutory licensing royalties that they receive from the subscription services to recording artists. Forty-five percent of these royalties must be allocated to featured artists; 2\1/2\ percent of the royalties must be distributed by the American Federation of Musicians to non- featured musicians; and 2\1/2\ percent of the royalties must be distributed by the American Federation of Television and Radio Artists to non-featured vocalists. 17 U.S.C. 114(g). 3. The DMCA The new statutory license for digital audio transmission of sound recordings was expanded in the Digital Millennium Copyright Act of 1998 (``DMCA''), Public Law 105-304, 112 Stat. 2860 (1998). It provided that certain digital transmissions and retransmissions, typically referred to as webcasting, are subject to the section 106(6) digital performance right and that webcasters who transmit/retransmit sound recordings on an interactive basis, as defined in section 114(j), must obtain the consent of, and negotiate fees with, individual owners of those recordings. However, webcasting would be eligible for statutory licensing when done on a non-interactive basis. Accordingly, Congress created another statutory license in sections 114(d)(2) & (f)(2) for ``eligible nonsubscription transmissions,'' which include non- interactive transmissions of sound recordings by webcasters. 17 U.S.C. 114(d)(2). To qualify for that license, the webcaster must comply with several conditions in addition to those that the DPRA applied to preexisting subscription and satellite radio services. As with these service royalties, webcaster royalties are allocated on a 50-50 basis to copyright owners and to performers. Congress adopted the DPRA voluntary negotiation and arbitration procedures for the DMCA webcaster performance license. 17 U.S.C. 114(e), (f). However, it changed the statutory standard for determining rates and terms. The new standard is to determine what ``most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.'' 17 U.S.C. 114(f)(2)(B). Congress also recognized that webcasters who avail themselves of the section 114 license may need to make one or more temporary or ``ephemeral'' copies of a sound recording in order to facilitate the transmission of that recording. Accordingly, Congress created a new statutory license in section 112(e) for such copies and extended that license to services that transmit sound recordings to certain business establishments under the section 114(d)(1)(c)(iv) exemption created by the DPRA. Congress retained the DPRA voluntary negotiation and arbitration procedures for the section 112 ephemeral license. 17 U.S.C. 112(e)(2), (3). Congress again applied the willing buyer/willing seller standard applicable to the section 114 webcaster performance license. 17 U.S.C. 112(e)(4). The webcasting and [[Page 24087]] ephemeral statutory licenses created by the DMCA are the subject of this proceeding. The two DMCA licenses were the subject of one prior proceeding. Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings and Ephemeral Recordings (Final Rule), 67 FR 45240 (July 8, 2002) (codified at 37 CFR part 261) (``Webcaster I''). After a recommendation from a CARP, the Librarian applied the statutory standard to determine rates and terms. Many of the parties in this proceeding participated in that prior proceeding. 4. The Reform Act Congress enacted a new system to administer copyright royalties with the Copyright Royalty and Distribution Reform Act of 2004 (the ``Reform Act''), Public Law 108-419, 118 Stat. 2341. The Copyright Royalty Judges were established to perform the functions previously served by the Copyright Royalty Tribunal and the Librarian of Congress. They were appointed January 9, 2006, and took over this proceeding. B. Section 114(f)(2) 1. The Statutory Language The criteria for setting rates and terms for the section 114 webcaster performance license are enunciated under 17 U.S.C. 114(f)(2)(B), which provides in pertinent part: * * * Such rates and terms shall distinguish among the different types of eligible nonsubscription transmission services then in operation and shall include a minimum fee for each such type of service, such differences to be based on criteria including, but not limited to, the quantity and nature of the use of sound recordings and the degree to which use of the service may substitute for or may promote the purchase of phonorecords by consumers. In establishing rates and terms for transmissions by eligible nonsubscription services and new subscription services, the Copyright Royalty Judges shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In determining such rates and terms, the Copyright Royalty Judges shall base [their] decision on economic, competitive and programming information presented by the parties, including-- (i) whether use of the service may substitute for or may promote the sales of phonorecords or otherwise may interfere with or may enhance the sound recording copyright owner's other streams of revenue from its sound recordings; and (ii) the relative roles of the copyright owner and the transmitting entity in the copyrighted work and the service made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, and risk. 17 U.S.C. 114(f)(2)(B). The statute further directs the Judges to set ``a minimum fee for each such type of service'' and grants the Judges discretion to consider the rates and terms for ``comparable types of digital audio transmission services and comparable circumstances under voluntary license agreements'' negotiated under the voluntary negotiation provisions of the statute. Id. 2. The Relationship of the Statutory Factors to the ``Willing Buyer/ Willing Seller'' Standard Webcaster I clarified the relationship of the statutory factors to the willing buyer/willing seller standard. The standard requires a determination of the rates that a willing buyer and willing seller would agree upon in the marketplace. In making this determination, the two factors in section 114(f)(2)(B)(i) and (ii) must be considered, but neither factor defines the standard. They do not constitute additional standards, nor should they be used to adjust the rates determined by the willing buyer/willing seller standard. The statutory factors are merely to be considered, along with other relevant factors, to determine the rates under the willing buyer/willing seller standard. Webcaster I; In re Rate Setting for Digital Performance Right in Sound Recordings and Ephemeral Recordings, No. 2000-9 CARP DTRA 1 & 2 (``Webcaster I Carp Report''). 3. The Nature of ``The Marketplace'' The parties agree that the directive to set rates and terms that ``would have been negotiated'' in the marketplace between a willing buyer and a willing seller reflects Congressional intent for the Judges to attempt to replicate rates and terms that ``would have been negotiated'' in a hypothetical marketplace. Webcaster I CARP Report at 21. The ``buyers'' in this hypothetical marketplace are the Services (and other similar services) and this marketplace is one in which no statutory license exists. Id. See also Noncommercial Educational Broadcasting Compulsory License (Final rule and order), 63 FR 49823, 49835 (September 18, 1998) (``[I]t is difficult to understand how a license negotiated under the constraints of a compulsory license, where the licensor has no choice but to license, could truly reflect `fair market value.' ''). The ``sellers'' in this hypothetical marketplace are record companies, and the product being sold consists of a blanket license for the record companies' complete repertoire of sound recordings. Webcaster I, 67 FR 45244 (July 8, 2002). 4. The Appropriate Willing Buyer/Willing Seller Rate As noted, the statute directs us to ``establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace.'' 17 U.S.C. 114(f)(2)(B) (emphasis added). In the hypothetical marketplace we attempt to replicate, there would be significant variations, among both buyers and sellers, in terms of sophistication, economic resources, business exigencies, and myriad other factors. Congress surely understood this when formulating the willing buyer/willing seller standard. Accordingly, the Judges construe the statutory reference to rates that ``most clearly represent the rates * * * that would have been negotiated in the marketplace'' as the rates to which, absent special circumstances, most willing buyers and willing sellers would agree. Webcaster I, 67 FR 45244, 45245 (July 8, 2002); Webcaster I CARP Report at 25, 26. C. Section 112(e) The criteria for setting rates and terms for the section 112 ephemeral license are enunciated under 17 U.S.C. 112(e)(4), which provides in pertinent part: The Copyright Royalty Judges shall establish rates that most clearly represent the fees that would have been negotiated in the marketplace between a willing buyer and a willing seller. In determining such rates and terms, the Copyright Royalty Judges shall base their decision on economic, competitive, and programming information presented by the parties, including-- (A) whether use of the service may substitute for or may promote the sales of phonorecords or otherwise interferes with or enhances the copyright owner's traditional streams of revenue; and (B) the relative roles of the copyright owner and the transmitting organization in the copyrighted work and the service made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, and risk. 17 U.S.C. 112(e)(4). As does section 114, this section further directs the Judges to set ``a minimum fee for each type of service.'' 17 U.S.C. 112(e)(4). Although section 112 does not explicitly grant the Judges discretion to consider the rates and terms for comparable types of services, it does explicitly grant discretion to ``consider the rates and terms under voluntary license agreements'' negotiated under the provisions of the statute. 17 U.S.C. 112(e)(4). Accordingly, while the language of the two sections varies in minor respects, the Judges interpret the criteria for setting rates and terms as [[Page 24088]] essentially identical. See Webcaster I Order of July 16, 2001, at 5. IV. Determination of Royalty Rates A. Application of Section 114 and Section 112 Based on the applicable law and relevant evidence received in this proceeding, the Copyright Royalty Judges must determine rates for two licenses, the section 114 webcaster performance license and the section 112 ephemeral reproduction license. The Copyright Act requires that the Copyright Royalty Judges establish rates for each of these two licenses that most clearly represent those ``that would have been negotiated in the marketplace between a willing buyer and a willing seller'' and directs the Copyright Royalty Judges to set a minimum fee for each license. In the case of both licenses, the Copyright Act requires the Copyright Royalty Judges to take into account evidence presented on such factors as (1) whether the use of the webcasting services may substitute for or promote the sale of phonorecords and (2) whether the copyright owner or the service provider make relatively larger contributions to the service ultimately provided to the consuming public with respect to creativity, technology, capital investment, cost and risk. 17 U.S.C. 114(f)(2)(B) and 17 U.S.C. 112 (e)(4). Having carefully considered the relevant law and the evidence received in this proceeding, the Copyright Royalty Judges determine that the appropriate section 114 performance license rate is a per performance usage rate for Commercial Webcasters and an annual flat per-station rate for Noncommercial Webcasters for use up to a specified cap coupled with a per performance rate for use above the cap, while the appropriate section 112 reproduction license rate is deemed to be included in the applicable respective section 114 license rates. The applicable rate structure is the starting point for the Copyright Royalty Judges' determination. B. The Rate Proposals of the Parties and the Appropriate Royalty Structure for Section 114 Performance Licenses 1. Commercial Webcasters The contending parties present several alternative rate structures for Commercial Webcasters. In its final revised rate proposal, SoundExchange argues in favor of a monthly fee equal to the greater of: 30% of gross revenues or a performance rate beginning at $.0008 per performance in 2006 and increasing annually to $.0019 by 2010.\4\ This fee structure is proposed for nonsubscription services and is modified to add a third alternative in its ``greater of'' formulation of a $1.37 per subscriber minimum for new subscription services.\5\ An exception to this ``greater of'' formulation is proposed for so-called ``bundled services'' from which SoundExchange seeks a per performance rate of $.002375 to be adjusted each year by the change in the CPI-U. SoundExchange's Revised Rate Proposal (filed September 29, 2006) at 2- 12. --------------------------------------------------------------------------- \4\ The latter $.0019 per performance rate is to be adjusted by the change in the CPI-U from December 2005 to December 2009 (accordingly, if the CPI-U increases by 3% in each of these four twelve-month periods, the resulting per performance rate for 2010 would increase from $.0019 to $.00214). \5\ In addition, SoundExchange proposes an adjustment to its revenue alternative based on time spent listening to music for so- called ``non-music'' services, a per performance rate of $.002375 to be adjusted each year by the change in the CPI-U for ``bundled services'' and a 25% premium for transmissions terminating on wireless devices for nonsubscription services, new subscription services and bundled services. --------------------------------------------------------------------------- By contrast, DiMA on behalf of certain large commercial webcasters, proposes a fee structure under which webcasters could elect a fee equal to either $.00025 per performance or $.0038 per Aggregate Tuning Hour (``ATH'') or 5.5% of revenue directly associated with the streaming service. However, DiMA applies only its per performance usage rate to ``bundled services'' situations where the bundle price to the consumer is not allocated as between the individual component parts of the bundle. DiMA PFF at ]] 35-38. Smaller commercial webcasters present varying proposals. SBR Creative Media, Inc., a privately owned commercial webcaster, proposes a fee structure under which webcasters can elect a fee equal to either a use metric of $.0033 per Aggregate Tuning Hour (``ATH'') or 4% of gross revenue. SBR Creative Media PFF at ] 19. The self-styled Small Commercial Webcasters,\6\ in contrast to all the other commercial parties, propose a pure revenue-based metric equal to 5% of gross revenues. Small Commercial Webcasters PCL at ] 24. --------------------------------------------------------------------------- \6\ The Small Commercial Webcasters are AccuRadio, LLC; Digitally Imported, Inc.; Radioio.com, LLC; Discombobulated, LLC; 3WK, LLC and Radio Paradise, Inc. --------------------------------------------------------------------------- Radio Broadcasters propose an annual flat fee \7\ structure generally related to usage as reflected in the format of the radio station being simulcast over the web. For example, Radio Broadcasters propose that music-formatted stations pay a fee ranging from as little as $500 per annum for small stations in low revenue ranked markets to as much as $8,000 per annum for large stations in high revenue ranked markets, but further propose that news, talk, sports and/or business stations pay $250 per annum irrespective of station size in low revenue ranked markets and $750 per annum irrespective of station size in high revenue ranked markets. Finally, Radio Broadcasters propose that stations with mixed music/non-music formats pay a percentage of the music format fee, depending on the percentage of programming identified as music programming. Radio Broadcasters PFF at ]] 325-338. --------------------------------------------------------------------------- \7\ Radio Broadcasters further propose that the structure increase across the board by 4% annually over the term of the license. --------------------------------------------------------------------------- In short, among the parties on both sides who have proposed rates covering Commercial Webcasters, only Small Commercial Webcasters propose a fee structure based solely on revenue. However, in making their proposal, this group of five webcasters clearly is unconcerned with the actual structure of the fee, except to the extent that a revenue-based fee structure especially one in which the percent of revenue fee is a single digit number (i.e., 5%)--can protect them against the possibility that their costs would ever exceed their revenues.\8\ Their only witness, Kurt Hanson, CEO/President of AccuRadio, LLC, in fact, provided testimony indicating that the Small Commercial Webcasters were, at bottom, concerned with the amount of the fee rather than the structure of the fee. (``Obviously, were there to be a sound recording royalty based on performances that was at an extremely low rate * * * a percentage-of-revenue model might not be required. And just as obviously, a confiscatory percentage-of-revenue rate would not allow these companies [the Small Commercial Webcasters] to survive.'') Hanson, WDT at 4 n.2. Small Commercial Webcasters' focus on the amount of the fee, rather than how it should be structured, is further underlined by the absence of evidence submitted by this group to identify a basis for applying a pure revenue-based structure to them. While, at times, they suggest that their situation as small [[Page 24089]] commercial webcasters requires this type of structure, there is no evidence in the record about how the Copyright Royalty Judges would delineate between small webcasters and large webcasters.\9\ Similarly, while Mr. Hanson asserts that a percentage-of-revenue is necessary because ``this is a nascent industry'' or because small entrepreneurs require such a structure, 8/3/06 Tr. 49:12-22 (Hanson), he offers no evidence to support that assertion or to help define the parameters of the assertion. Furthermore, the only other self-styled small entrepreneur to offer testimony in this proceeding, SBR Creative Media Inc., specifically includes a usage metric in its rate proposal and neither SBR Creative Media, Inc. nor the Small Commercial Webcasters offers any evidence to distinguish between their respective situations. --------------------------------------------------------------------------- \8\ It must be emphasized that, in reaching a determination, the Copyright Royalty Judges cannot guarantee a profitable business to every market entrant. Indeed, the normal free market processes typically weed out those entities that have poor business models or are inefficient. To allow inefficient market participants to continue to use as much music as they want and for as long a time period as they want without compensating copyright owners on the same basis as more efficient market participants trivializes the property rights of copyright owners. Furthermore, it would involve the Copyright Royalty Judges in making a policy decision rather than applying the willing buyer/willing seller standard of the Copyright Act. \9\ Indeed, since none of the small commercial webcasters participating in this proceeding provided helpful evidence about what demarcates a ``small'' commercial webcaster from other webcasters at any given point in time, any determination that a revenue-based metric was somehow uniquely applicable to small commercial webcasters would be speculative. --------------------------------------------------------------------------- While each of the remaining contending parties--SoundExchange, DiMA, Radio Broadcasters and SBR Creative Media, Inc.--proposes a fee structure for Commercial Webcasters that contains revenue-based elements as well as either usage elements or a usage alternative, from the evidence of record, the Copyright Royalty Judges conclude that numerous factors weigh in favor of a per-performance usage fee structure for Commercial Webcasters. First, as aptly stated by Dr. Adam Jaffe, revenue merely serves as ``a proxy'' for what ``we really should be valuing, which is performances.'' Jaffe, WDT Section N, Designated Testimony (Jaffe WDT in Webcaster I at 22). By contrast, a per-performance metric ``is directly tied to the nature of the right being licensed, unlike other bases such as revenue * * * of the licensee.'' Id. (Emphasis in original.) The more intensively an individual service is used and consequently the more the rights being licensed are used, the more that service pays and in direct proportion to the usage.\10\ Jaffe, WDT Section N, Designated Testimony (Jaffe WDT in Webcaster I at 21-22). As Dr. Jaffe points out, with a usage metric, the resultant ``scaling'' of the royalty paid to the extent of use ``is intuitively appealing and is a common feature'' of intellectual property licenses. Jaffe, WDT at 32. Dr. Jaffe notes that, by contrast, ``Revenue is a less exact proxy for the scale of activity, because the revenue that a licensee derives, even from its music-related activities can be influenced by a variety of factors that have nothing to do with music.'' Id. Therefore, Dr. Jaffe cautions that a revenue-based metric should only be used as a proxy for a usage-based metric where the revenue base used for royalty calculation is ``carefully defined to correspond as closely as possible to the intrinsic value of the licensed property.'' Id. The Copyright Royalty Judges do not find a sufficient clarity of evidence based on the record in this proceeding to produce a revenue-based metric that can serve as a good proxy for a usage-based metric. Furthermore, there was no persuasive evidence offered by any commercial webcasting/ simulcasting party to indicate that a usage-based metric is not readily calculable and, that as a consequence, the Copyright Royalty Judges must resort to some proxy metric in reaching their fee determination. --------------------------------------------------------------------------- \10\ Dr. Erik Brynjolfsson is similarly of the opinion that ``the rates paid by a given company should take into account that different companies use different amounts of music.'' 11/21/06 Tr. 251:2-18 (Brynjolfsson). --------------------------------------------------------------------------- Second, percentage-of-revenue models present measurement difficulties because identifying the relevant webcaster revenues can be complex, such as where the webcaster offers features unrelated to music. Webcaster I noted this particular difficulty. 67 FR 45249 (July 8, 2002). Mixed format webcasters/simulcasters continue to make up a significant part of the commercial webcasting market and, in a number of cases, generate the more significant portion of their revenues from non-music programming. RBX1; RBX7; RBX20; 7/27/06 Tr. 283:7-285:12 (Hauth). Clearly, questions surrounding the proper allocation of revenues related to music use in such instances present greater complexity than a straightforward use of a usage-based approach.\11\ --------------------------------------------------------------------------- \11\ This is illustrated in the SoundExchange rate proposal where an additional adjustment is made to the proposed revenue rate where services conform to a definition of ``non-music services'' as measured by the listening time of end users. By contrast, in the same rate proposal no such adjustment needs to be made to the proposed usage rate for the same services. The added information necessary for the adjustment as well as the process of adjustment to the revenue-based metric clearly would raise the transaction costs of implementing a revenue rate structure as compared to the usage- based metric. SoundExchange's Revised Rate Proposal (filed September 29, 2006) at 11-12. --------------------------------------------------------------------------- Third, percentage of revenue metrics ultimately demand a clear definition of revenue so as to properly relate the fee to the value of the rights being provided, and no such clear definition has been proffered by the parties. Indeed, the definition of revenue has been a point of substantial contention between two of the parties in this proceeding. SoundExchange sought an expansive definition of revenue, ostensibly covering revenues from subscription fees, advertisements (of many kinds including advertisements directly and indirectly derived from webcasting), sales of products and commissions from third party sales, software fees and sales of data. SoundExchange's Revised Rate Proposal (filed September 29, 2006) at 12-17. But the Copyright Royalty Judges are not persuaded that all the elements of the SoundExchange definition of revenue have been shown, in every instance, to be related to the use of the rights provided to licensees.\12\ For example, there is some evidence presented by the Radio Broadcasters that on-air talent, programming director contributions and marketing skills impact the revenues of simulcasting webcasters. Radio Broadcasters PFF at ]] 234, 237, 240. DiMA has proposed a much more restrictive definition of revenue as part of its rate proposal which it seeks to support through the testimony of its witness, Donald Fancher. On the whole, we find little to recommend Mr. Fancher's testimony, but the Copyright Royalty Judges do observe that even Mr. Fancher conceded that, on various points, the DiMA proposed definition was unclear. 6/22/06 Tr. 292:11- 295:14; 308:1-309:1; 311:15-312:10; 315:17-317:14 (Fancher). The absence of persuasive evidence of what constitutes an unambiguous definition of revenue that properly relates the fee to the value of the rights being provided militates against reliance on a revenue-based metric. --------------------------------------------------------------------------- \12\ Moreover, the mere process of measuring such an expansive array of revenues must necessarily raise transaction costs for the parties. --------------------------------------------------------------------------- Fourth, the use of a revenue-based metric gives rise to difficult questions for purposes of auditing and enforcement related to payment for the use of the license. The per-performance approach involves the relatively straightforward application of a rate to reports of use (recordkeeping) data that is already required to be produced by the Services. See 37 CFR part 370. While audit and enforcement issues may arise even with a pure usage metric, the alternative use of a revenue- based metric will give rise to additional, different issues of interpretation and controversy related to how revenues are defined or allocated. See, for example, Radio Broadcasters PFF at ] 258 and 7/31/ 06 Tr. 78:3-11, 79:1-13 (Parsons). In other words, the introduction of multiple payment systems will augment [[Page 24090]] the transactions costs imposed on the parties. Fifth, the way that the contending parties, in particular SoundExchange and DiMA, suggest using a revenue-based metric in their rate proposals does not square with the basic notion agreed to by their respective experts (Dr. Brynjolfsson for SoundExchange and Dr. Jaffe for DiMA) that the more the rights being licensed are used, the more payments should increase in direct proportion to usage. See supra at Section IV.B.1. SoundExchange seeks to use the revenue-based metric to insure that it will share in any revenue produced by the Services that is greater than what it would receive based on a usage rate coupled with actual usage. Pelcovits WDT at 28. This could result in a situation where the Services would be forced to share revenues that are not attributable to music use, but rather to other creative or managerial inputs. DiMA, on the other hand, seeks to employ a revenue- based metric to protect against the failure of revenues produced by the Services (particularly as they pursue a shift to advertising-supported business models) to rise to the level necessary to pay for music use based on actual usage. Winston WDT at 10. This could result in a situation in which copyright owners are forced to allow extensive use of their property without being adequately compensated due to factors unrelated to music use such as a dearth of managerial acumen at one or more Services. The similar potentiality that webcasters might generate little revenue and, under a revenue-based metric, produce a situation where copyright owners receive little compensation for the extensive use of their property was a concern that animated the Librarian to approve a per performance metric rather than providing for a revenue- based payment option in Webcaster I. 67 FR 45249 (July 8, 2002). For all of the above reasons, the Copyright Royalty Judges conclude that evidence in the record weighs in favor of a per-performance usage fee structure for Commercial Webcasters. This does not mean that some revenue-based metric could not be successfully developed as a proxy for the usage-based metric at some time in the future by the parties if the problems noted above were remedied. It does mean that the parties to this proceeding have not overcome these problems in the context of the proposals they have offered in this proceeding.\13\ --------------------------------------------------------------------------- \13\ While both SoundExchange and DiMA have pointed to a number of agreements covering music rights that embody an alternative revenue-based metric, they have not shown: (1) Whether those agreements have overcome these problems or, (2) if so, how those agreements have overcome these problems or, (3) most importantly, how their proposed rate structures embody comparable mechanisms for overcoming these problems. Nor have they demonstrated whether these other agreements have been negotiated with a revenue-based option in the context of comparable circumstances-for example, an agreement negotiated with a revenue-based alternative because of an inability of some services to account for performances would not be comparable to the circumstances at hand because of our recordkeeping requirements at 37 CFR part 370. --------------------------------------------------------------------------- A further consequence of the Copyright Royalty Judges rejecting the revenue-based metric as a proxy for a usage-based metric is to eliminate the need for a rate structure formulated as a ``greater of'' or ``lesser of'' comparison between per performance metrics and alternative revenue-based metrics.\14\ Therefore, the Copyright Royalty Judges determine that a per-performance rate structure will be utilized for eligible nonsubscription transmission services, new subscription services and bundled services and where such services are commercial Services. --------------------------------------------------------------------------- \14\ In addition, while SoundExchange proposes a third alternative--a per subscription minimum dollar amount--to be applied to new subscription services, the Copyright Royalty Judges do not find the basis for this alternative structure to be supported by persuasive evidence. SoundExchange cannot be proposing this per subscription alternative because of a lack of music usage data from subscription services, because the per subscription alternative itself requires such usage data in order to make a pro rata distribution of the per subscription minimum to the record companies. See Pelcovits WDT at 22. Nor does SoundExchange present persuasive evidence that the availability of this per subscription alternative is necessary because it is easier to administer and thus will reduce transaction costs. Indeed, although SoundExchange makes it an alternative to the per-performance fee in its proposed structure, SoundExchange presents its purpose as equivalent to the function served by the per-performance fee in its proposed fee structure. See Pelcovits WDT at 28-29. Moreover, SoundExchange's own expert economist, Dr. Brynjolfsson, further notes that in cases where webcasters ``monetize'' the value of the sound recording license through subscriptions or advertising revenue, ``counting the number of plays is a good proxy'' for that value. 5/18/06 Tr. 116:9- 117:14 (Brynjolfsson). For all these reasons, the Copyright Royalty Judges decline to establish such a duplicative structure. --------------------------------------------------------------------------- 2. Noncommercial Webcasters The Copyright Royalty Judges also find that a revenue-based metric is not a good proxy for a usage-based metric as applied to noncommercial webcasters in the non-interactive webcasting marketplace because, in addition to suffering from the same shortcomings discussed supra at Section IV.B.1. in the context of the Commercial Webcasters,\15\ no evidence of negotiated agreements applying a revenue-based metric to Noncommercial Webcasters has been presented by any of the parties. --------------------------------------------------------------------------- \15\ Indeed, the use of a revenue-based metric in connection with Noncommercial Webcasters may further exacerbate transactions costs where defining of revenue, accounting for revenue and auditing of such accounts involve different concepts for the noncommercial, non-profit entities that populate this marketplace as compared to the accounting concepts and approaches applicable to commercial entities. For example, NPR derives significant amounts of its revenues from several sources not typically found as a source of commercial service revenue, such as underwriting, donations, public funds and the NPR Foundation. NPR PFF at ] 18. --------------------------------------------------------------------------- Only one party in this proceeding, SoundExchange, proposes that Noncommercial Webcasters should be subject to a rate structure incorporating a revenue-based metric as one alternative means of payment. SoundExchange specifically proposes that Noncommercial Webcasters pay according to the same structure and rates applicable to Commercial Webcasters, previously summarized supra at Section IV.B.1. The Noncommercial Webcasters propose a variety of rates that are (or could be read as) per station flat rates. For example, NPR proposes a flat fee of $80,000 per annum, with successive years after the first year increased by a cost-of-living adjustment as determined by the change in the CPI. NPR proposes that this flat fee cover all NPR (798) and CPB-qualified stations (estimated at 100 or 200). Stern WDT at 13; 6/27/06 Tr. 154:18-155:18 (Stern). The NRBNMLC proposes that non-commercial, non-NPR music stations pay a flat annual fee consisting of the lesser of (a) $200 per Internet simulcast and up to two associated side channels or (b) $500 per group of up to five Internet simulcasts and up to two Internet-only side channels per simulcast. The NRBNMLC further proposes that for news, talk, business, teaching/talk, or sports stations the aforementioned annual fee alternatives drop to $100 and $250 respectively. Mixed format stations would pay a pro rata share of these annual fees based on the demonstrated music-talk programming breakdown. Finally, NRBNMLC proposes that all five years of such fees covering the 2006-2010 license term be paid in one lump sum at the beginning of the term, except that a broadcaster that stops streaming before the end of the term would be entitled to a pro rata refund.\16\ NRBNMLC Fee Proposal August 1, 2006. --------------------------------------------------------------------------- \16\ NRBNMLC also proposes a decrease in its annual fees ``to match the per station fees of NPR if the NPR station fees are lower than the above-stated fees.'' NRBNMLC Fee Proposal August 1, 2006. --------------------------------------------------------------------------- IBS' amended rate proposal seeks a $100 annual rate for large college stations and a $25 annual rate for [[Page 24091]] smaller college stations.\17\ IBS Clarification of Common Rate Proposal (August 10, 2006).\18\ CBI proposed a flat annual fee of $175 for educational stations. CBI Amended Introductory Statement at 6. --------------------------------------------------------------------------- \17\ The IBS rates herein summarized were to be applicable only to noncommercial educational stations not covered by the annual lump sum payment proposed by NPR and CPB. \18\ IBS' original proposal consisted of a flat fee of $500 per year for music stations and $250 per year for non-music stations, with additional payments in the event that the webcaster exceeded 146,000 aggregate tuning hours in a month. Kass WDT at Ex. A. --------------------------------------------------------------------------- For the reasons discussed infra at Section IV.C.2.a., the Copyright Royalty Judges determine that Commercial Webcasters and certain Noncommercial Webcasters represent two different segments of the marketplace. In contrast to the general commercial marketplace, agreements produced by the parties in this proceeding covering noncommercial services typically structured payments as flat fees. See, for example, SERV-D-X 157. Furthermore, no evidence was presented by the parties that could be used in a precise way to convert such flat annual fees into a reliable per-performance metric. Consequently, only a per station metric could be ascertained from such flat fees. Flat annual fees do not present the complexity, measurement difficulties, accounting and enforcement issues presented by revenue- based alternatives, and, as a result, do not increase transaction costs beyond what might be experienced under a usage-based fee structure. On the other hand, flat fees do permit increasing usage without increasing payment. However, as noted infra at Section IV.C.2.a, the Copyright Royalty Judges have determined that in order to preserve the distinction between the commercial webcasters and certain noncommercial segments of the marketplace over the period of the license term, a cap on usage must be established for certain noncommercial webcasters. In short, the Copyright Royalty Judges conclude that, on balance, the most appropriate rate structure for noncommercial services that can be reliably derived from the record of evidence is an annual flat per- station rate structure for use by certain noncommercial webcasters up to a specified cap coupled with a per performance rate for use by noncommercial services that exceed the cap. C. The Section 114 Royalty Rates and Minimum Fees 1. Commercial Webcasters a. The ``Willing Buyer/Willing Seller Standard'' As previously noted hereinabove, supra at Section IV.A., the Copyright Act requires that the Copyright Royalty Judges establish rates for the section 114 performance license that ``most clearly'' represent those ``that would have been negotiated in the marketplace between a willing buyer and a willing seller.'' Both the copyright owners and the commercial services agree that the willing buyer/willing seller standard should be applied by the Copyright Royalty Judges in determining the rates for the section 114 license and both the copyright owners and the commercial services agree that those rates should reflect the rates that would prevail in a hypothetical marketplace that was not constrained by a statutory license. Finally, both copyright owners and commercial services agree that the best approach to determining what rates would apply in such a hypothetical marketplace is to look to comparable marketplace agreements as ``benchmarks'' indicative of the prices to which willing buyers and willing sellers in this marketplace would agree. SoundExchange PFF at ]] 215-219; SoundExchange PCL at ]] 4-27; DiMA and Radio Broadcasters JPFF at ]] 75-80; DiMA and Radio Broadcasters JPCL at ]] 28-9; DiMA PFF at ]] 39-45; Radio Broadcasters PFF at ]] 296-301; SBR Creative Media, Inc. PFF at ]] 17; Small Commercial Webcasters PFF at ]] 24-28. However, the parties, to some extent, appear to disagree about the degree of competition among sellers required by law in the hypothetical marketplace, resulting in different definitions of the sellers in the hypothetical marketplace.\19\ SoundExchange accuses the Services of seeking a marketplace characterized by perfect competition. DiMA and the Radio Broadcasters claim that SoundExchange is championing a marketplace characterized by monopoly power on the seller's side. SoundExchange PCL at ] 38; DiMA and Radio Broadcasters JPCL at ]] 29, 36. We find that these extreme characterizations miss the mark. --------------------------------------------------------------------------- \19\ For example, at one extreme, if no competition exists on the seller's side of the market (i.e., the seller is a monopolist), then the degree of competition observed describes the number of sellers in the marketplace (i.e., there is a single seller in the marketplace). --------------------------------------------------------------------------- The question of competition is not confined to an examination of the seller's side of the market alone. Rather, it is concerned with whether market prices can be unduly influenced by sellers' power or buyers' power in the market. This issue was addressed in Webcaster I. An effectively competitive market is one in which super-competitive prices or below-market prices cannot be extracted by sellers or buyers, because both bring ``comparable resources, sophistication and market power to the negotiating table.'' 67 FR 45245 (July 8, 2002). In other words, neither sellers nor buyers can be said to be ``willing'' partners to an agreement if they are coerced to agree to a price through the exercise of overwhelming market power. Furthermore, we find that in the hypothetical marketplace that would exist in the absence of a statutory license constraint, the willing sellers are the record companies. Any cognizable entity smaller than the record companies makes little sense because, in such cases, the larger buyers among the Services would enjoy disproportionate market power resulting in below-market prices. At the same time, if the sellers' side of the market were characterized by so many sellers as to be consistent with perfect competition, the transaction costs to the buyers of the copyrights would likely be prohibitive. Webcaster I made clear that ``the willing buyers are the services which may operate under the webcasting license (DMCA-compliant services), the willing sellers are record companies and the product consists of a blanket license for each record company which allows use of that record company's complete repertoire of sound recordings.'' 67 FR 45244 (July 8, 2002) (emphasis added). None of the parties has adduced persuasive evidence that this definition of sellers has been altered in the marketplace as a result of greater or lesser competition between these sellers since Webcaster I was issued. For example, no party provided any empirical evidence on the elasticity of the demand curve facing these firms in the market or, more importantly, whether it has changed since Webcaster I. Similarly, no party produced persuasive evidence that market share had changed substantially among the record companies in the hypothetical marketplace since Webcaster I.\20\ -----------------------------------------------------------------------
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