Determination of Royalty Rates for Digital Performance Right in Sound Recordings and Ephemeral Recordings, 23101-23139 [2014-08664]

Agencies

• Copyright Royalty Board, Library of Congress
• Library of Congress

[Federal Register Volume 79, Number 80 (Friday, April 25, 2014)]
[Rules and Regulations]
[Pages 23101-23139]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-08664]



[[Page 23101]]

Vol. 79

Friday,

No. 80

April 25, 2014

Part III





Library of Congress





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Copyright Royalty Board





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37 CFR Part 380





Determination of Royalty Rates for Digital Performance Right in Sound 
Recordings and Ephemeral Recordings; Final Rule

Federal Register / Vol. 79 , No. 80 / Friday, April 25, 2014 / Rules 
and Regulations

[[Page 23102]]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 380

[Docket No. 2009-1 CRB Webcasting III]


Determination of Royalty Rates for Digital Performance Right in 
Sound Recordings and Ephemeral Recordings

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Copyright Royalty Judges announce 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 on January 1, 
2011, and ending on December 31, 2015.

DATES: Effective Date: April 25, 2014.
    Applicability Dates: These rates and terms are applicable to the 
period January 1, 2011, through December 31, 2015.

FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or 
Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658. Email: 
crb@loc.gov.

SUPPLEMENTARY INFORMATION: On July 6, 2012, the United States Court of 
Appeals for the District of Columbia Circuit (DC Circuit) remanded this 
matter for determination. The Copyright Royalty Judges (Judges) 
determine that the royalty rates payable under 17 U.S.C. 114(f) for the 
public performance by webcasters of digital sound recordings for the 
period 2011 through 2015 shall be as follows. For commercial webcasters 
subject to the agreement between the National Association of 
Broadcasters and SoundExchange, as stipulated in the agreement. For all 
other commercial webcasters:

------------------------------------------------------------------------
                                                             Rate per-
                          Year                              performance
                                                                \1\
------------------------------------------------------------------------
2011....................................................         $0.0019
2012....................................................          0.0021
2013....................................................          0.0021
2014....................................................          0.0023
2015....................................................          0.0023
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    The Judges determine that section 114 public performance rates for 
noncommercial webcasters shall be as follows. For noncommercial 
educational webcasters, as agreed by and between College Broadcasters, 
Inc. and SoundExchange in the agreement approved by the Judges in this 
proceeding. For other noncommercial webcasters, the rate shall be $500 
per station or channel, including side channels, up to a maximum usage 
of 159,140 Aggregate Tuning Hours \2\ (ATH) per month. Commercial usage 
rates apply to usage in excess of 159,140 hours per month.
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    \1\ This rate is applicable from first performance, but subject 
to recoupment credit for the agreed minimum fee of $500 per year for 
each station or channel.
    \2\ ``Aggregate Tuning Hours'' is defined in SoundExchange's 
rate proposal as using the same definition employed during the 2006-
2010 rate period and codified at 37 CFR 380.2 (2010). It is a 
measure of the duration of all programming transmitted by licensee, 
less the actual running time of any sound recordings that are 
licensed directly or which do not require a license under the Act.
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    All parties in interest in this proceeding agreed that royalties 
payable for the license granted under 17 U.S.C. 112(e) should be 
bundled with the section 114 royalties and deemed to be 5% of the 
bundled remittances. The Judges adopt this agreement for the period 
2011 through 2015.
    Following are the bases of the Judges' determination.

I. Introduction
    A. Subject of the Proceeding
    B. Procedural Posture
    C. Statutory Background
    D. The Record
II. Rates Under the Section 112 Ephemeral License
III. Rate Structure Under the Section 114 Performance License
IV. Rates for Commercial Webcasters
    A. The National Association of Broadcasters/SoundExchange 
Agreement
    B. All Other Commercial Webcasters
    1. The Live365 Rate Proposal
    2. The SoundExchange Rate Proposal
    3. The ``Affordability'' of the Proposed Interactive Benchmark 
Rates
    4. Judges' Conclusions Regarding the Commercial Webcasters Rates
V. Rates for Noncommercial Webcasters
    A. Noncommercial Educational Webcasters
    B. Other Noncommercial Webcasters
    1. Rate Proposals of the Participants
    2. Evaluation of the Rate Proposals and Determination of Rates
VI. Terms
    A. Uncontested Terms
    1. Collective
    2. Stipulated Terms and Technical and Conforming Changes
    3. Electronic Signature on Statement of Account
    B. Contested Terms for Commercial Webcasters
    1. Terms Proposed by Live365
    2. Terms Proposed by SoundExchange
    C. Contested Terms for Noncommercial Webcasters
VII. Determination and Order

I. Introduction

A. Subject of the Proceeding

    This Determination results from a rate proceeding convened under 
section 803(b) of the Copyright Act (Act), 17 U.S.C. 803(b). On January 
5, 2009, the Copyright Royalty Judges (Judges) announced commencement 
of the captioned proceeding. See, 74 FR 318 (Jan. 5, 2009). The purpose 
of the proceeding was to determine royalty rates and terms for the 
public performance of digital sound recordings by eligible 
nonsubscription transmission services or new subscription services, as 
defined in section 114 of the Act.\3\ This proceeding includes 
determination of rates and terms relating to the making of ephemeral 
copies under section 112 of the Act in furtherance of the digital 
public performances. The rates and terms the Judges determine in this 
proceeding apply to the period of January 1, 2011, through December 31, 
2015. See 17 U.S.C. 804(b)(3)(A).
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    \3\ Including as amended by the Digital Millennium Copyright Act 
(DMCA), Public Law 105-304, 112 Stat. 2860, 2887 (Oct. 27, 1998).
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B. Procedural Posture

    In response to the Judges' published notice of commencement, forty 
entities filed Petitions to Participate. The participants followed the 
statutory procedures for rates and terms determinations, which include 
a voluntary negotiation period. In addition, Congress provided expanded 
opportunities for settlement by passing the Webcaster Settlement Acts 
of 2008 and 2009 (WSA).\4\ Most participants negotiated agreements 
relating to rates and terms prior to the hearing.\5\
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    \4\ Public Law 110-435, 122 Stat. 4974 (Oct. 16, 2008); Public 
Law 111-36, 123 Stat. 1926 (June 30, 2009). The Webcaster Settlement 
Acts of 2008 and 2009 authorized webcasters to negotiate rates and 
terms for the section 112 and 114 licenses to be effective during 
the then current rate term in lieu of the adjudicated rates for that 
term, and to extend through the rate term at issue in this 
proceeding. The WSAs also gave parties the option to exclude those 
negotiated terms from evidence in a proceeding before the Judges 
notwithstanding the provisions of sections 112(e)(4) and 
114(f)(2)(B), which permit the Judges to consider evidence of 
voluntarily negotiated licenses in determining statutory rates and 
terms.
    \5\ The participants reached eight settlements in all, 
accounting for approximately 95% of the royalties paid to 
SoundExchange in 2008 and 2009. The Copyright Office published 
notices of settlements as follows: 74 FR 9293 (Mar. 3, 2009) (three 
agreements); 74 FR 34796 (July 17, 2009) (one agreement); and 74 FR 
40614 (Aug. 12, 2009) (four agreements).
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    When the Judges convened the hearing to determine rates and terms 
applicable to the non-settling participants, the parties remaining 
were: SoundExchange, Inc. (SoundExchange),

[[Page 23103]]

College Broadcasters, Inc. (CBI),\6\ the Intercollegiate Broadcasting 
System, Inc. (IBS), Live365, Inc. (Live365), RealNetworks, Inc., and 
Royalty Logic, LLC. The Judges heard evidence for seven days in April 
2010 in the direct case and three days in July 2010 in the rebuttal 
case. On May 5, 2010, the Judges heard oral argument relating to the 
settlement and resulting regulatory language proposed jointly by 
SoundExchange and CBI. The Judges heard closing arguments of counsel on 
July 30, 2010.
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    \6\ In August 2009, under the auspices of the WSA of 2009, CBI 
and SoundExchange reached a settlement between them (CBI/
SoundExchange Agreement) covering rates and terms for certain 
college broadcasters and noncommercial educational webcasters. The 
Copyright Office published notice of this settlement on August 12, 
2009. See 74 FR 40616 (Aug. 12, 2009). CBI and SoundExchange then 
filed a joint motion for approval of their settlement and adoption 
of its terms as the applicable regulations for all noncommercial 
educational webcasters. The Judges published proposed regulations 
based upon the CBI/SoundExchange agreed rates and terms. See 75 FR 
16377 (Apr. 1, 2010). The Judges received multiple comments in favor 
of the proposed regulations and an objection from IBS. The Judges, 
therefore, heard oral argument of counsel in May 2010, and published 
the Final Rule relating to the CBI/SoundExchange Agreement and the 
NAB/SoundExchange Agreement. See 76 FR 13026 (Mar. 9, 2011).
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    Following presentation of written and testimonial evidence, legal 
briefing, and argument of counsel, the Judges published their Final 
Determination in this matter on March 9, 2011. See 76 FR 13026 (Mar. 9, 
2011). IBS filed a timely appeal to the United States Court of Appeals 
for the DC Circuit. IBS asserted on appeal that the $500 minimum fee 
and the attendant recordkeeping and reporting requirements established 
for noncommercial webcasters is excessive and burdensome for small 
college broadcasters. IBS further challenged the Constitutionality of 
the statutory construct granting the DC Circuit the power not just to 
affirm, reverse, or remand appeals from the CRB, but also to remediate 
CRB determinations--an ability IBS challenged as a non-judicial 
function and unconstitutional under Article III of the Constitution. 
IBS likewise challenged the constitutionality of the Judges under the 
Appointments Clause of the United States Constitution. U.S. Const., 
art. II, sec. 2, cl.2.\7\
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    \7\ IBS argued that the Judges were principal officers of the 
United States government and, as such, must be appointed by the 
President with the advice and consent of the United States Senate. 
IBS also opined that the Librarian is not an agency head authorized 
to appoint inferior officers of the government, notwithstanding that 
the Librarian is appointed by the President and confirmed by the 
Senate.
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    SoundExchange and CBI intervened in the appeal. Both intervenors 
filed briefs in support of the Judges' determination. SoundExchange 
controverted the constitutional challenges asserted by IBS. CBI sought 
to assure the validity of its agreement with SoundExchange regardless 
of the resolution of the constitutional issues.
    On July 6, 2012, the DC Circuit ruled that the Judges were acting 
as principal officers of the United States government in violation of 
the Appointments Clause of the Constitution. Intercollegiate 
Broadcasting Sys., Inc. v. Copyright Royalty Board, 684 F.3d 1332, 1342 
(D.C. Cir. 2012), cert. denied, 133 S. Ct. 2735 (2013).\8\ To cure the 
violation of the Appointments Clause, the DC Circuit excised that 
portion of the Act that limited the Librarian's ability to remove 
Judges. Having determined that the Judges were not validly appointed at 
the time they issued the challenged determination, the DC Circuit 
``vacate[d] and remand[ed] the determination,'' without addressing any 
substantive issue on appeal, so that a constitutionally appointed panel 
of Judges could render a new determination. Id. at 1334, 1342.
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    \8\ To remedy the violation of the Appointments Clause, the 
Librarian appointed the incumbent panel as at-will employees. The 
Librarian appointed the current panel of Judges while the IBS appeal 
was pending; consequently, the panel of Judges making the 
determination on remand is not the same as the panel that made the 
first determination.
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    Following the Supreme Court's denial of IBS's petition for a writ 
of certiorari, the Judges requested proposals from the participants on 
the conduct of proceedings on remand. Order for Further Briefing (July 
26, 2013). SoundExchange essentially argued for a summary reissuance of 
the Judges' original determination and CBI argued for summary adoption 
of its settlement with SoundExchange. IBS urged the Judges to reopen 
the proceeding to allow additional written and oral testimony and new 
briefing. IBS argued in the alternative that the Judges permit each 
participant to submit new briefs.
    The substantive issues on appeal were (i) the $500 minimum fee for 
noncommercial educational webcasters and (ii) terms proposed by IBS 
relating to ``small'' and ``very small'' noncommercial webcasters. The 
language of the DC Circuit's remand, however, was not limited to any 
specific portion of the determination. Rather, the DC Circuit 
``vacate[d] and remand[ed] the determination.'' Id. at 1342 (emphasis 
added). The Judges interpret the Court's remand order as directing the 
Judges to review the entire record and to issue a new determination on 
all issues included therein, not just the $500 minimum fee that was the 
subject of the appeal.
    The Judges have considered both the language of the remand order 
and proposals from the participants regarding remand procedure. While 
the DC Circuit's remand instructions compel the Judges to consider anew 
all issues in the original determination, the Judges decline to reopen 
the proceeding and accept additional evidence or argument. Each party 
had ample opportunity to present its case.\9\ The Judges have concluded 
that this matter shall be determined based upon a de novo review of the 
substantial record that the parties developed during the proceeding 
leading to the first determination.
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    \9\ The Judges' consideration of this issue is discussed in 
detail in Notice of Intention to Conduct Paper Proceeding on Remand 
and Solicitation of Comments from the Parties (Sept. 17, 2013).
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    Upon completion of their de novo review of the existing record, the 
Judges issued their initial Determination After Remand for Royalty 
Rates and Terms for 2011-2015, Docket No. 2009-1 CRB Webcasting III 
(Jan. 9, 2014) (Initial Determination). Pursuant to 17 U.S.C. 803(c)(2) 
and 37 CFR Part 353, IBS filed a motion for rehearing. After reviewing 
the motion, the Judges denied the motion for rehearing. Order Denying 
Motion for Rehearing, Docket No. 2009-1 CRB Webcasting III (Feb. 4, 
2014). As explained in the February 4, 2014 Order, the Judges 
determined that IBS had failed to show that any part of the Initial 
Determination was erroneous, i.e., IBS's arguments did not satisfy the 
``exceptional case'' standard necessary to warrant a rehearing. More 
particularly, the motion failed to establish: (1) An intervening change 
in controlling law, (2) the availability of new evidence, or (3) a need 
to correct a clear error or prevent manifest injustice. Id.

C. Statutory Background

    Transmission of a sound recording constitutes a public performance 
of that work. Owners of copyright in sound recordings are not accorded 
an exclusive, general public performance right with regard to those 
recordings. See 17 U.S.C. 106(4). Owners of copyright in ``musical 
works,'' \10\ have an exclusive right of public performance of those 
works; owners of copyright in ``sound recordings'' \11\ do not. As a

[[Page 23104]]

consequence, U.S. copyright law permits many public performances of 
sound recordings--including radio broadcasts--to take place without the 
authorization of, or compensation to, sound recording copyright owners 
(e.g., performers and record labels).
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    \10\ A ``musical work'' is a musical composition, together with 
any accompanying words, that has been fixed in any tangible medium 
of expression. See 17 U.S.C. 102(a)(2).
    \11\ `` `Sound recordings' are works that result from the 
fixation of a series of musical, spoken, or other sounds, but not 
including the sounds accompanying a motion picture or other 
audiovisual work, regardless of the nature of the material objects, 
such as disks, tapes, or other phonorecords, in which they are 
embodied.'' 17 U.S.C. 101.
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    In 1995, Congress enacted the Digital Performance Right in Sound 
Recordings Act (DPRA),\12\ which created and granted to sound recording 
copyright owners a new exclusive right to perform a sound recording 
publicly by means of a digital audio transmission. 17 U.S.C. 106(6). 
The new right was, however, subject to a number of important 
limitations, including the grant to subscription digital audio 
transmission services (including satellite digital audio radio 
services) of a statutory license that permitted them to use sound 
recordings without the agreement of the copyright owner. 17 U.S.C. 
114(d)(2), (f) (1997) (amended 1998).
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    \12\ Public Law 104-39, 109 Stat. 336 (Nov. 1, 1995).
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    Technology proceeded apace and, within a few short years, digital 
transmissions of sound recordings over the Internet were prevalent and 
available from both subscription and nonsubscription services. Congress 
did not specifically contemplate these ``webcaster'' services when it 
drafted the DPRA. Consequently, Congress expanded the statutory license 
in section 114 to cover ``eligible nonsubscription transmissions,'' 
i.e., webcasting, when it enacted the Digital Millennium Copyright Act 
of 1998, Public. Law 105-304, 112 Stat. 2860 (Oct. 28, 1998),

    To ensure that recording artists and record companies will be 
protected as new technologies affect the ways in which their 
creative works are used; and . . . to create fair and efficient 
licensing mechanisms that address the complex issues facing 
copyright owners and copyright users as a result of the rapid growth 
of digital audio services. . . .

H.R. Rep. No. 105-796, at 79-80 (1998).
    In addition, in recognition of the fact that webcasters must make 
temporary copies of sound recordings in order to facilitate the 
transmission process, Congress created a compulsory licensing scheme 
for so-called ``ephemeral'' recordings. See id. at 89-90. Licensees are 
limited to no more than one ephemeral recording (unless the terms of 
the license permit more) for use in the broadcasting or transmission of 
the copied work. 17 U.S.C. 112(e). The ephemeral recording must be 
transitory in nature, unless the licensee retains it solely for 
archival purposes. See 17 U.S.C. 112(a).
    In the Copyright Royalty and Distribution Reform Act of 2004,\13\ 
Congress created the role of Copyright Royalty Judge and authorized the 
Judges, inter alia, to determine and set rates and terms for the 
licensing and use of copyrighted works in several contexts, e.g., cable 
television transmission, satellite radio broadcast, and, the medium 
relevant to this proceeding, webcasting. Congress retained the prior 
statutory standards and made them applicable to the Judges for 
determining rates and terms for both the ephemeral and the public 
performance licenses. For webcasting rates under either license, the 
``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.'' 17 U.S.C. 114(f)(2)(B). 
The quoted language is substantially identical to the statutory 
language regarding ephemeral recordings. See 17 U.S.C. 112(e)(4).
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    \13\ Public Law 108-419, 118 Stat. 2341 (Nov. 30, 2004).
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    To ascertain rates that represent this hypothetical market under 
both statutory sections, the Judges shall consider ``economic, 
competitive, and programming information presented by the parties. . . 
.'' Id. The Judges are not limited with regard to the evidence they may 
consider (other than the limitations in the WSAs on the use of 
agreements reached under those statutes). The Judges' determination 
relating to both licenses should also account for whether the use at 
issue might substitute for, promote, or otherwise affect the copyright 
owners' stream of revenues. The Judges must also consider, again for 
both licenses, the relative contributions of the owners and licensees 
in making the licensed work available to the public. Id. Except as 
directed by the WSAs, the Judges may consider rates and terms 
negotiated in voluntary licensing agreements for comparable 
transmission services. Id.

D. The Record

    SoundExchange, Live365, IBS, and CBI presented evidence in this 
proceeding.\14\ CBI only presented evidence to support adoption of its 
settlement with SoundExchange for noncommercial educational webcasting. 
SoundExchange and Live365 presented evidence relating to commercial 
webcasters. SoundExchange presented evidence relating to noncommercial 
webcasting; IBS presented evidence for small noncommercial webcasters. 
The Judges received written and live testimony from 15 witnesses \15\ 
and admitted 60 documentary exhibits into evidence.
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    \14\ After filing Written Direct Statements, RealNetworks, Inc. 
withdrew from the proceedings, and Royalty Logic, LLC, did not 
participate further.
    \15\ The Judges also considered designated written testimony.
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    The record on which the Judges base this determination after remand 
is the existing record, including written and oral legal argument of 
counsel, and transcripts of the entire determination proceeding.\16\
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    \16\ The original panel of judges heard approximately ten days 
of testimony and legal argument in aggregate, resulting in 
approximately 2,600 pages of transcripts.
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II. Rates Under the Section 112 Ephemeral License

    Between the direct and rebuttal phases of this proceeding, 
SoundExchange and Live365 presented settlements of (i) the minimum fee 
and royalty rates for the section 112 license and (ii) the minimum fee 
for the section 114 license applicable to the commercial webcasters not 
encompassed by the NAB/SoundExchange Agreement. These two settlements 
were included in one stipulation. The terms of the settlement are the 
same as the agreement reached and included as a final rule following 
the prior webcasting rate determination, following remand. See Digital 
Performance Right in Sound Recordings and Ephemeral Recordings (Final 
rule), 75 FR 6097 (Feb. 8, 2010).
    The minimum fee for commercial webcasters is an annual, 
nonrefundable fee of $500 for each individual channel and each 
individual station (including any side channel), subject to an annual 
cap of $50,000. The royalty rate for the section 112 license is bundled 
with the fee for the section 114 license. There is one additional term 
in the stipulation that was not included in the prior determination. 
The royalty rate for the section 112 license is deemed to be 5% of the 
bundled royalties. No party objected to the stipulation. SoundExchange 
presented unopposed evidence to support the minimum fee for commercial 
webcasters and the bundled royalty rates. See SoundExchange Proposed 
Findings of Fact (SX PFF) at ]] 459-468, 472. These agreed provisions 
are supported by the parties and the evidence.
    There is no disagreement between SoundExchange and IBS as to the 
rates for the section 112 license for noncommercial webcasters. As it 
did for commercial webcasters, SoundExchange

[[Page 23105]]

proposed a bundled rate approach for both the section 112 and section 
114 rights, allocating 5% of the entire bundled royalty as the section 
112 royalty. SX PFF at ] 671. IBS endorsed the proposal. Amplification 
of IBS' Restated Rate Proposal, at 2. The testimony offered by 
SoundExchange supported this proposal and the Judges adopt it. See, 
e.g., Ford WDT at 9-12, 14-15; 4/20/10 Tr. at 434 (Ford); 4/22/10 Tr. 
at 729-31 (McCrady); Post-Hearing Responses to Judges' Questions by 
Michael D. Pelcovits, at 5 (May 21, 2010).
    The issues remaining for the Judges' determination are (i) rates 
and terms for commercial webcasters' section 114 licenses and (ii) the 
rates and terms--specifically, the minimum fee--for noncommercial 
webcasters' section 114 licenses.

III. Rate Structure Under the Section 114 Performance License

    The Copyright Act clearly establishes the willing buyer/willing 
seller standard for the royalty rates at issue in this proceeding. See 
17 U.S.C. 114(f)(2)(B). To establish the level of such rates, the 
Judges must first determine the structure of those rates, i.e., the 
metric or metrics that willing buyers and sellers likely would have 
negotiated in the marketplace.
    SoundExchange and Live365 proposed that royalties for the section 
114 license be computed pursuant to a per-performance usage structure. 
SoundExchange acknowledged, however, that ``[t]he metrics by which most 
services pay'' are the ``percentage-of-revenue'' metric or the ``per-
subscriber'' metric--both of which are not fixed rates,'' but rather 
are rates that increase the monetary payment ``as subscribers and 
revenue increase.'' SX Reply PFF ] 74. However, neither SoundExchange 
nor Live365 proposed an alternative to the per-performance rate 
structure.
    SoundExchange's industry witness noted the ubiquity of rate 
structures based on revenues or subscribership. More particularly, W. 
Tucker McCrady, Associate Counsel, Digital Legal Affairs at Warner 
Music Group acknowledged that ``[i]n the U.S., WMG does not have a 
single agreement with an audio streaming service where the payment 
amount is based solely on a per-play rate, as is the case with the 
statutory license.'' See McCrady WDT at 10. As Mr. McCrady further 
explained, the per-play royalty fee is typically combined with a 
percentage-of-revenue royalty fee, so that a per-play floor is seen as 
sort of a minimum protection for the value of the music,'' whereas, 
beyond that minimum, ``a revenue share . . . allows us to share in the 
upside . . . .'' 4/22/10 Tr. at 658 (McCrady) (emphasis added).
    Live365 introduced as an exhibit in this proceeding the prior 
written direct testimony of Dr. Pelcovits in the previous webcasting 
proceeding, Digital Performance Right in Sound Recordings and Ephemeral 
Recordings, Final rule and order, 72 FR 24084, 24090 (May 1, 2007), 
aff'd in relevant part sub nom. Intercollegiate Broad. Sys. v. 
Copyright Royalty Bd., 574 F.3d 748 (D.C. Cir. 2009)(Web II), in which 
he testified:
     Through the percentage-of-revenue, the record companies 
ensure that they will receive a share of royalties in the benchmark 
interactive market that properly compensates them for their valuable 
copyrighted material,
     The business justification for the percentage-of-revenue 
structure is so compelling it should be adopted as the rate structure 
for the statutory license,
     Removing the percentage-of-revenue element would unravel 
the complex set of factors that affected the negotiations, and 
undoubtedly would change the underlying rates, and
     There is a good argument that the percentage-of-revenue 
rate applied in the interactive market should simply be adopted for the 
noninteractive market.

Live365 Tr. Ex. 5, at 28-30.
    The parties to the instant proceeding declined to propose rates 
based explicitly upon the revenues of webcasters, apparently because 
they had concluded that the Judges would reject revenue-based 
rates.\17\ The parties thus submitted no evidence as to any alternative 
rate structure premised explicitly on the percentage-of-revenue 
realized by webcasters.
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    \17\ For example, SoundExchange expressly noted that in Web II 
both the webcasters and SoundExchange ``proposed rate structures 
that included revenue-based elements and usage-based elements [but 
t]he Judges . . . concluded that a per-performance usage fee 
structure was more appropriate for commercial webcasters, and 
rejected revenue-based proposals.'' SX PFF ] 36 (quoting Web II, 72 
FR at 24089). Likewise, Dr. Pelcovits indicated that his choice of a 
rate structure was constrained by the fact that the Judges in Web II 
had ``rejected alternatives such as fees calculated as a percentage 
of the buyer's revenue. . . .'' Pelcovits WDT at 6. The Judges note, 
however, that the rejection of percentage-of-revenue rate structures 
in Web II was based on the evidentiary record in that proceeding and 
that Web II explicitly did not establish a per se rejection of such 
rate structures. Web II, 72 FR at 24090 (``[The] evidence in the 
record weighs in favor of a per-performance usage fee structure. . . 
.This does not mean that some revenue-based metric could not be 
successfully developed. . . .'').
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    Given the limitations of the record developed by the parties, the 
Judges defer to the parties' decision to eschew advocacy for such 
percentage-of-revenue based fees in this proceeding. 17 U.S.C. 
114(f)(2)(B) (``In determining . . . rates and terms the Copyright 
Royalty Judges shall base their decision on . . . information presented 
by the parties . . . .''). Accordingly, the Judges consider the 
relative merits of the competing per-performance rates proposed by the 
two contending parties.
    The Judges recognize, however, that as a practical and strategic 
matter, participants in these proceedings carefully consider prior rate 
proceedings as roadmaps to ascertain the structure of the rates they 
propose. Mindful of that fact, the Judges wish to emphasize that by 
deferring to the present parties' decision to propose only a per-
performance rate structure, the Judges do not per se reject future 
consideration of rate structures predicated upon other measurements, 
such as a percentage of revenue realized by webcasters.\18\
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    \18\ Of course, the Judges' adoption of any rate structure in a 
future proceeding would depend upon the evidence and arguments the 
participants present, including arguments addressing concerns raised 
by the Judges in earlier proceedings. See, e.g., Web II, 72 FR at 
24089-90. The Judges' possible future consideration of a percentage-
of-revenue rate structure in a section 114(f)(2)(B) proceeding for 
noninteractive webcasting does not suggest that such a structure or 
the resulting rates should necessarily be related in any manner to 
the structure or level of rates set (pursuant to section 801(b)(1) 
for preexisting services identified in section 114(f)(2)(B)). 
Determination of Reasonable Rates and Terms for the Digital 
Performance of Sound Recordings and Ephemeral Recordings, Final rule 
and order, 67 FR 45240, 45244 (July 8, 2002)(Web I). Additionally, 
although rates might be set pursuant to the same structure under 
both statutory provisions, there is no reason why the level of rates 
would necessarily be the same.
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IV. Rates for Commercial Webcasters

A. The National Association of Broadcasters/SoundExchange Agreement

    Section 801(b)(7)(A) of the Act allows for the adoption of rates 
and terms negotiated by ``some or all of the participants in a 
proceeding at any time during the proceeding,'' provided they are 
submitted to the Copyright Royalty Judges for approval. The Judges must 
adopt the settlement after affording all interested parties an 
opportunity to comment, unless a participant in the proceeding objects 
to it and the Judges determine that the settlement does not provide a 
reasonable basis for setting rates and terms.
    On June 1, 2009, the National Association of Broadcasters (NAB) and 
SoundExchange filed a settlement of all issues between them in this 
proceeding, including proposed rates and terms (NAB/SoundExchange 
Agreement). Their settlement was one of several WSA agreements that the 
Copyright

[[Page 23106]]

Office published in the Federal Register. NAB and SoundExchange filed 
their WSA agreement in the instant proceeding and requested that the 
Judges adopt the agreed rates and terms for some services of commercial 
broadcasters for the period 2011 through 2015. The settlement applies 
to statutory webcasting activities of commercial terrestrial 
broadcasters, including digital simulcasts of analog broadcasts and 
separate digital programming. The settlement includes per-performance 
royalty rates, a minimum fee, and reporting requirements.
    The Judges published the settlement (with minor modifications \19\) 
as proposed regulations in the Federal Register on April 1, 2010, and 
provided interested parties an opportunity to comment and object by 
April 22, 2010. 75 FR 16377 (Apr. 1, 2010) (publishing NAB/
SoundExchange and CBI/SoundExchange Agreements). The Judges received no 
comments or objections; therefore, the provisions of section 
801(b)(7)(A)(ii) (permitting the Judges to decline to adopt the 
settlement as a basis for statutory rates and terms) are inapplicable. 
In the absence of an objection from a party that would be bound by the 
proposed rates and terms, the Judges adopt the rates and terms in the 
settlement for certain digital transmissions of commercial broadcasters 
for the period of 2011-2015. 17 U.S.C. 801(b)(7)(A).
---------------------------------------------------------------------------

    \19\ Exercising the right granted in the WSAs, SoundExchange and 
NAB provided in their agreement that, unlike the rates and terms 
they set for the section 114 licenses, the rates and terms they set 
for the ephemeral recording license could not be used as evidence 
and would not serve as precedent in any contested rate 
determination. The Judges, deeming such language inappropriate to 
the purposes of the regulations, declined to include it in the 
published regulations. For the same reason, the Judges declined to 
accept language in the agreement regarding SoundExchange's 
acceptance of a broadcaster's election to be a ``Small Broadcaster'' 
or the broadcaster's reservation of rights. The Judges also declined 
on the same basis to include some of the language of the CBI 
agreement.
---------------------------------------------------------------------------

B. All Other Commercial Webcasters

    Only two participants--SoundExchange and Live365--presented 
evidence relating to public performance royalty rates for commercial 
webcasters.
    SoundExchange proposed that the section 114 royalty rates for 
noninteractive webcasting be established by applying two categories of 
benchmarks:
     Agreements between SoundExchange and: (a) The NAB; and (b) 
Sirius XM Satellite Radio (Sirius XM), both of which established per-
performance royalty rates for the same noninteractive webcaster rights 
that are at issue in this proceeding; and
     Rates established in a different but purportedly analogous 
market--the market for interactive webcasting of digital sound 
recordings--adjusted to render them probative of the rates for 
noninteractive webcasting.

Relying on these proposed benchmarks, SoundExchange proposed the 
following royalty rate schedule:

------------------------------------------------------------------------
                                                             Rate per-
                          Year                              performance
------------------------------------------------------------------------
2011....................................................         $0.0021
2012....................................................          0.0023
2013....................................................          0.0025
2014....................................................          0.0027
2015....................................................          0.0029
------------------------------------------------------------------------

SX PFF ] 11.
    Live365 proposed that commercial webcasters pay $0.0009 per 
performance throughout the entire period 2011-2015. Live365 PFF ] 170. 
In addition, Live365 sought a 20% discount on its proposed per-
performance rate for ``Internet radio aggregators,'' such as itself, to 
account for the alleged value to copyright owners of their provision of 
certain specified ``aggregation services.'' Live365 PFF ] 193.
    Live365's proposed rate is not premised upon any benchmarks. Its 
economic expert, Dr. Mark Fratrik, stated that he was ``not aware of 
comparable, voluntary license agreements that would serve as an 
appropriate benchmark for an industry-wide rate.'' Fratrik Corrected 
and Amended WDT at 7 [hereinafter, Fratrik WDT].\20\
---------------------------------------------------------------------------

    \20\ Throughout this determination, the Judges will employ 
abbreviations that they have used in past determinations, e.g., 
``WDT'' for the last version of the witness's Written Direct 
Testimony; ``WRT'' for Written Rebuttal Testimony; ``Tr.'' for 
hearing transcripts; ``PFF'' for Proposed Findings of Fact, etc.
---------------------------------------------------------------------------

    Rather, Live365 proposed a unique model by which:
     Revenues are estimated for a supposedly ``representative'' 
webcaster;
     All costs--except for the royalty fees to be determined--
are estimated for a ``representative'' webcaster; and
     Royalty fees are established, on a per-performance basis, 
at a level which assures the ``representative'' webcaster a 20% 
operating margin, i.e., a 20% profit.
1. The Live365 Rate Proposal
    As discussed above, Live365 proposed a single constant rate of 
$0.0009 for each year of the 2011-2015 rate period. This proposed rate 
was supported by Dr. Fratrik's written and oral testimony.
    With regard to the fundamentals of the hypothetical market, Dr. 
Fratrik first assumed, correctly, that the ``underlying product'' 
consisted of ``blanket licenses for each record company which allows 
use of that record company's complete repertoire of sound recordings.'' 
Fratrik WDT at 8. Next, he properly assumed that the rates must be 
those that would be negotiated between a willing buyer and a willing 
seller. Fratrik WDT at 4.
    With regard to the market participants, Dr. Fratrik properly 
identified the hypothetical ``willing buyers'' to be the webcasting 
services that operated under the statutory license.'' Id. at 8. He also 
properly identified the ``hypothetical willing sellers'' as the several 
record companies. Id.
    To determine the statutory rate, Dr. Fratrik attempted to determine 
the appropriate license rate based upon an examination of the ``revenue 
and cost structure of a mature webcaster--in this case, Live365.'' Id. 
at 4.
    For assumed revenues, Dr. Fratrik utilized in his model ``publicly 
available industry data on webcasting revenues.'' Id. These revenue 
figures were not historical data, but rather ``estimates of revenues 
recognizing the changing marketplace.'' Id. at 10. More particularly, 
Dr. Fratrik relied upon ``[p]ublicly available industry reports from 
Accustream and ZenithOptimedia [to] serve as lower and upper bounds, 
respectively, on advertising revenue measurements for the past 
period.'' Id. at 16. Although webcaster revenue came from two sources, 
subscriptions and advertising, the only data available to Dr. Fratrik, 
and the only data he used, were advertising revenues. Id. at 16-17.
    For assumed costs, Dr. Fratrik utilized the ``operating costs'' 
from Live365. Id. at 5. Given the mechanics of his model, the costs he 
included were ``all of the operating costs except for the royalty rates 
to be paid to the copyright owners.'' Id. (emphasis added). The royalty 
cost is omitted because it is the ``unknown'' that Dr. Fratrik's 
analysis is designed to determine. Dr. Fratrik chose to utilize the 
costs incurred by Live365 because, in his opinion, ``Live365 is a 
representative webcaster with respect to its operating costs . . . and 
will serve as a good conservative proxy for the industry as it is a 
mature operator.'' Id. at 16.
    With regard to the difference between revenues and costs, i.e., 
profits, Dr. Fratrik assumed that ``a Commercial webcaster is entitled 
to a reasonable profit margin.'' Id. at 17 (emphasis added). 
Accordingly, Dr. Fratrik

[[Page 23107]]

attempted to identify a ``fair operating margin (measured as a 
percentage of revenues)'' for a hypothetical webcaster. Id. at 5. Dr. 
Fratrik's proposal fails to create a royalty rate framework that can 
satisfy the statutory criteria viz., rates that would have been 
negotiated in the marketplace between a willing buyer and a willing 
seller; the Judges cannot adopt it.
a. Dr. Fratrik's Misapplication of a Public Utility-Style Rate-Setting 
Process in the Present ``Willing Buyer/Willing Seller'' Statutory 
Context
    Dr. Fratrik's methodology mimics the methodology by which 
government agencies or commissions set rates for public utilities or 
other regulated natural monopolies. There is no basis in the Act or in 
economic theory to support the use of this paradigm to establish 
royalty rates for the licensing of sound recordings by noninteractive 
webcasters.
    A fundamental defect in this reasoning is Dr. Fratrik's requirement 
that the statutory royalty rate must provide for a fixed ``profit 
margin'' for webcasters. See 4/27/10 Tr. at 1138 (Fratrik) (``I believe 
the 20 percent rate is what they would strive to get and have to 
get.'') (emphasis added). Dr. Fratrik does not provide any evidentiary 
support for the assumption that the record companies, i.e., the willing 
sellers in the hypothetical marketplace, would accept (or be compelled 
to accept) a royalty rate simply because it allowed buyers to realize a 
predetermined level of revenue as profits. Further, Dr. Fratrik does 
not provide any evidentiary support for his assumption that the buyers, 
i.e., the webcasters, would require a royalty rate low enough to 
maintain a predetermined 20% profit margin or otherwise be driven out 
of the marketplace. See 4/27/10 Tr. at 1166-67 (Fratrik) (Dr. Fratrik 
unaware of any webcasters earning 20% operating margin).
    Not only does Dr. Fratrik's methodology lack evidentiary support, 
it has embedded within it a perverse incentive structure. Dr. Fratrik's 
methodology would cause the royalty rates to be a function not only of 
the revenues of the webcasters, but also a function of: (i) The other 
(non-royalty) operating costs incurred by the webcasters; and (ii) the 
guaranteed profit (20% according to Dr. Fratrik) after inclusion of the 
(to be determined) royalty costs. This fundamental flaw in Dr. 
Fratrik's methodology can be demonstrated algebraically as follows:
    Dr. Fratrik's requirement of a 20% operating profit for webcasters 
can be expressed as:

TOTAL PROFIT = TOTAL REVENUE (TR) - TOTAL COST (TC) = 0.2(TR)

    Dr. Fratrik dichotomizes costs into royalty costs (i.e., the 
unknown to be determined) and all other operating costs, which can 
be expressed as:

TC = Royalty Costs (rc) + All Other Operating Costs (oc)

    So,

TR - rc - c = 0.2(TR)

    Subtracting 0.2(TR) from both sides of the equation results in 
the following:

0.8(TR) - rc--oc = 0

    Adding rc to both sides of the equation results in the 
following:

0.8(TR) - oc = rc

    For presentation purposes, the above equation can be set forth 
in reverse as:

rc = 0.8(TR) - oc

    This presentation makes plain that in Dr. Fratrik's model the 
royalty rate would be a function of: (i) The revenues of the webcaster 
(TR); and (ii) all other webcaster costs (oc). Egregiously, the 
relationship between the royalty rate and all other costs incurred by 
the webcaster (oc) would be inverse, i.e., as all other costs (oc) 
increased, the section 114 royalty rate would decrease.
    Thus, a webcaster would have no incentive to minimize or otherwise 
reduce all other operating costs, because higher operating costs would 
result in a lower royalty paid to owners/compulsory licensors of sound 
recordings. Such a result would be perverse: The royalty revenue 
realized by the owners/licensors would be subject to the cost-
minimization successes or failures of the webcasters under a formula by 
which the latter had no incentive to minimize costs.\21\
---------------------------------------------------------------------------

    \21\ If webcasters operating under Dr. Fratrik's methodology did 
minimize or otherwise reduce all other operating costs, then, in 
order to prevent an increase in their pre-established profit margin, 
the royalty rate would need to increase. However, given that the Act 
requires these rates to be fixed for five years, the webcaster could 
reduce or minimize all other operating costs and simply pocket the 
profit, increasing their profit percentage above the level set by 
the Judges.
---------------------------------------------------------------------------

    As previously noted, Dr. Fratrik's methodology mimics the setting 
of public utility rates for natural monopolies. In that setting, the 
``unknown'' variable is the rate to be charged to the end-user, which, 
when multiplied by the number of units of the service sold, establishes 
the revenue received by the seller. What can be ``known'' (i.e., 
determined via such public utility-style hearings) are: (i) The 
reasonable costs incurred by the utility; and (ii) the fair rate of 
return to which the utility is deemed entitled by consideration of 
appropriate marketplace returns on capital. See generally Charles F. 
Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 
169 (2d ed. 1988).
    In the present proceeding, the ``unknown'' is different, but the 
proposed methodology is similar. What is ``unknown'' is one element of 
total costs, i.e., the royalty fee. The revenues received by the sale 
to the end-users (i.e., the provision of the listening experience to 
consumers) is known (or estimated), whether as a function of 
advertising revenues, subscriptions, or both. Here, as in classic rate 
regulation, the percentage to be realized as a rate of return (profit) 
likewise is known or discovered (as Dr. Fratrik purported to have 
``discovered'' the 20% return by his examination of the assertedly 
analogous terrestrial radio marketplace).
    The foregoing analysis crystalizes a fundamental problem in Dr. 
Fratrik's analysis: Rate-setting proceedings under section 114 of the 
Act are not the same as public utility rate proceedings. The Act 
instructs the Judges to use the willing buyer/willing seller construct, 
assuming no statutory license. The Judges are not to identify the 
buyers' reasonable other (non-royalty) costs and decide upon a level of 
return (normal profit) sufficient to attract capital to the buyers.
    Moreover, Dr. Fratrik's methodology attempts to graft a public 
utility style rate--designed to regulate a natural monopoly--onto a 
rate-setting scheme in which he properly acknowledges the existence of 
a multitude of buyers, whose costs are critical to his analysis. Public 
utility-style rate-setting procedures are designed to consider the 
costs and potential returns to a monopoly seller, not the costs or 
potential returns of numerous buyers.
    Not only does Dr. Fratrik's methodology improperly apply the public 
utility style rate-setting process, it ignores and thus exacerbates a 
particularly thorny issue in such rate regulation. Regulators of 
natural monopolies such as public utilities must ascertain the actual 
operating costs of the monopolist, and disallow inappropriate costs 
from entering the ``rate base.'' This undertaking is very difficult. 
See generally Richard Posner, Economic Analysis of Law 367 (6th ed. 
2003) (``The regulatory agency's success in monitoring the regulated 
firm's costs will inevitably be uneven.''); Paul Krugman & Robin Wells, 
Microeconomics 374 (2d ed. 2009) (``[R]egulated monopolies . . . tend 
to exaggerate costs to regulators . . . .'').
    Here, Dr. Fratrik relies upon only Live365's particular cost data, 
rather

[[Page 23108]]

than any industry-wide cost data, without providing any evidence that 
Live365's cost structure is representative of the industry. SX PFF ]] 
312-322. Further, there is no breakdown by Dr. Fratrik of those other 
operating costs incurred by Live365 that would ensure that his de facto 
rate base includes only appropriate categories of costs incurred at 
minimally efficient levels.
    To the extent Live365 is not sufficiently representative of all 
webcasters (or representative at all of other webcasters), Dr. 
Fratrik's methodology would yield an inaccurate royalty rate. On a more 
general level, to the extent the cost structure of any given webcaster 
is not representative of the industry writ large, Dr. Fratrik's 
methodology is hopelessly impractical. To utilize rate-of-return style 
regulation in a competitive industry such as webcasting would require 
information regarding the cost structures of thousands of buyers of 
sound recordings.
    This defect in Dr. Fratrik's methodology was made plain during his 
cross-examination. For example, Dr. Fratrik admitted that if other 
royalties (such as for musical works paid by Live365 to Performing 
Rights Organizations) were to increase, then, ceteris paribus, under 
his methodology the royalties paid to SoundExchange for sound 
recordings would decrease. 4/27/10 Tr. at 1127 (Fratrik). This 
relationship, as Dr. Fratrik also admitted, existed with regard to all 
costs (other than sound recording performance royalties) incurred by a 
webcaster. Pursuant to his methodology, for example, a webcaster's 
staff wages, payments to advertising agencies, and payment to bandwidth 
suppliers could all depress the sound recording royalty. Id. at 1125 
(Fratrik). Thus, Dr. Fratrik was compelled during cross-examination to 
conclude:

    Q: Okay. So basically the way you modeled this out, if anybody 
else who supplies an input to Live [365] raises their price, the 
result is going to be your suggested royalty rate goes down, right?
    A: Assuming all the other factors remain constant.

Id. at 1127-28.
    The Judges conclude that two glaring and fatal defects in Dr. 
Fratrik's methodology are: (i) Its ill-conceived attempt to utilize the 
public utility style ratemaking construct in this ``willing buyer/
willing seller'' context; and (ii) its reliance upon an inverse 
relationship between the sound recording royalty rate and all other 
operating costs incurred by webcasters.\22\ Thus, while (in the 
interest of completeness) the following section discusses details of 
the methodology proposed by Dr. Fratrik, the Judges' rejection of his 
overall rate structure alone constitutes a sufficient basis to reject 
Live365's proposed rate.
---------------------------------------------------------------------------

    \22\ The Judges distinguish Dr. Fratrik's methodology from a 
structure that would be based upon the percentage-of -revenue 
realized by a webcaster, without regard to the webcaster's other 
costs. If Dr. Fratrik's methodology had simply made the royalty rate 
a function of webcaster revenue, the methodology would have relied 
upon a positive (i.e., direct) relationship--as revenues received by 
webcasters increased, royalty rates would also increase. Such a 
methodology would constitute a percentage-of-revenue royalty rate, 
which (as noted supra) was rejected on evidentiary bases in 
Determination of Reasonable Rates and Terms for the Digital 
Performance of Sound Recordings and Ephemeral Recordings, Final rule 
and order, 67 FR 45240 (July 8, 2002)(Web I) and Web II, yet (as 
also noted supra) was not foreclosed by either of those decisions as 
a potential future basis for determining rates in a section 114 
proceeding.
---------------------------------------------------------------------------

b. The Specific Elements of Dr. Fratrik's Model and His Proposed Rates
    As summarized below, even assuming, arguendo, that the Live365 
model had been acceptable in theory to the Judges, the inputs in that 
model--costs, revenues and profit margin--failed to establish a 
credible ``marketplace'' rate under the ``willing buyer/willing 
seller'' standard.
(1) Costs
    Dr. Fratrik assumed that Live365's cost structure would serve as a 
good conservative proxy for the industry as it is a mature operator. 
Fratrik WDT at 16. This assumption is unsupported by the evidence, 
which revealed an array of existing webcasting services and business 
models. SX PFF at ] 323.
    Moreover, it would be unreasonable for the Judges to conclude, as 
Live365 urged, that these many disparate business models might be 
experiencing essentially the same unit costs. Indeed, Dr. Fratrik 
conceded that even Live365 has two separate business lines, 
``broadcasting'' services \23\ and webcasting and, further, that 
Live365 also acts as an aggregator with respect to webcasting. Dr. 
Fratrik offered no example of a comparable participant in the industry 
that is structured in this manner. Further, Dr. Fratrik failed in his 
attempt to adjust Live365's costs to isolate only webcasting 
operations, because he failed to address the synergistic nature of 
Live365's various lines of business. SX PFF at ]] 355, 357, 358.
---------------------------------------------------------------------------

    \23\ Live365 refers to the services it provides to webcasters as 
``broadcasting'' services, in an Orwellian (and unsuccessful) 
attempt to distinguish its principal webcasting business from its 
ancillary webcasting support services.
---------------------------------------------------------------------------

(2) Revenues
    The revenue side of Dr. Fratrik's analysis suffers from infirmities 
as well. Most importantly, Dr. Fratrik admitted that the advertising 
revenue estimates (from ZenithOptimedia and Accustream) upon which he 
relied were ``challenging'' because many webcasters do not report their 
revenues publicly. 4/27/10 Tr. at 1220 (Fratrik). The limitations of 
these databases diminished the credibility of the analyses that 
depended upon them.
    That analysis is apparently based only on Dr. Fratrik's analysis of 
revenues using the data Dr. Fratrik found to constitute his ``upper 
bound,'' derived from ZenithOptimedia data. In an attempt to avoid the 
acknowledged problems with these data, Dr. Fratrik attempted to mix and 
match his several revenue data sources. To further muddy the 
statistical waters and compromise his analysis, Dr. Fratrik added to 
the ``upper bound'' and ``lower bound'' of his combined data sets a 
third separate source--Live365's own subscription revenue data. This 
further admixture only underscores the lack of rigor and persuasiveness 
in the Live365 analysis.\24\
---------------------------------------------------------------------------

    \24\ Dr. Fratrik's analysis also makes certain assertions 
regarding future growth--or lack of future growth--in the webcasting 
industry. The Judges note that predictions by witnesses as to future 
industry growth are highly speculative--economists are not oracles 
and ergodicity should not be assumed--past growth (or decline) is 
not necessarily indicative of future trends. See generally John 
Maynard Keynes, The General Theory of Employment, Interest and Money 
97 (1936) (``Our knowledge of the factors which will govern the 
yield of an investment some years hence is usually very slight and 
often negligible. . . . If we speak frankly, we have to admit that 
our basis of knowledge for estimating . . . amounts to little and 
sometimes to nothing . . . even five years hence.) (emphasis added). 
The instant dispute makes the point well because the economy was in 
recession in all of 2008 and economic activity overall remained 
depressed throughout 2009, causing a reduction in the revenues 
received by many businesses throughout the United States and the 
world. That decline does not necessarily foretell a trend in a 
particular industry, including the markets for interactive and 
noninteractive sound recording licenses.
---------------------------------------------------------------------------

(3) Profit Margin
    Dr. Fratrik has not provided adequate support for the assumption of 
a 20% operating margin for webcasters in his analysis. That operating 
profit margin was not put forward as either a historical profit margin 
(or a forecasted profit margin) for webcasters. Indeed, Dr. Fratrik 
conceded that he had no ``evidence that actual webcasters'' would 
require a 20% operating margin, and that he was not aware of any

[[Page 23109]]

webcaster currently earning a 20% margin. 4/27/10 Tr. at 1166-67 
(Fratrik).
    Rather, Dr. Fratrik's 20% figure was derived from the profit 
margins reported by the over-the-air (a/k/a terrestrial) radio 
broadcasting industry. SX PFF at ]] 328, 330. However, the record of 
evidence in this proceeding does not support the notion that profit 
margins for webcasters are likely to be similar to the more capital 
intensive terrestrial radio industry. SX PFF at ]] 332-335. In fact, 
Dr. Fratrik admitted that the terrestrial radio industry requires much 
higher capital costs than webcasting, and that the barriers to entry 
are higher for terrestrial radio than for webcasting. 4/27/10 Tr. at 
1168-72 (Fratrik); see also SoundExchange rebuttal testimony of Dr. 
Janusz Ordover, WRT at 3 (``Dr. Fratrik's selection of a minimum 
expected margin of 20% is based on margins earned by terrestrial radio 
broadcasters, who operate in a market with higher fixed capital and 
other costs and therefore do not provide a useful benchmark from which 
to determine a reasonable operating margin.'').
    In fact, when choosing the 20% figure, Dr. Fratrik did not even 
look at the returns earned by any other digital business, which are 
lower than 5%. 4/27/10 Tr. at 1173-74 (Fratrik). Likewise, if Dr. 
Fratrik had considered the operating margins of record companies, he 
would have had to reconcile the fact that they too had operating 
margins of approximately 5% or less. 4/27/10 Tr. at 1175-76 (Fratrik).
c. Live365's Proposed Aggregator Discount
    Live365 seeks a further 20% discount applicable to the commercial 
webcasting per-performance rate for certain ``qualified webcast 
aggregation services'' that operate a network of at least 100 
independently operated ``aggregated webcasters'' that individually 
``stream less than 100,000 ATH per month of royalty-bearing 
performances.'' Rate Proposal For Live365, Inc., Appendix A, Proposed 
Regulations at Sec.  380.2 and Sec.  380.3(a)(2). This ``discount'' 
proposal may be more properly understood as a proposed term rather than 
an additional rate proposal. It is conditional; that is, it is 
applicable only to the extent that certain defined conditions are met 
(e.g., minimum number of 100 aggregated webcasters and each individual 
aggregated webcaster streaming less than 100,000 ATH per month). It 
proposes to establish a mechanism whereby a group of commercial 
webcasters under certain qualifying conditions may utilize a ``webcast 
aggregation service'' to aggregate their monitoring and reporting 
functions. Rate Proposal for Live365, Inc., Appendix A, Proposed 
Regulations at Sec.  380.2(m). Monitoring and reporting are compliance-
related functions that are currently required of all individual 
webcaster licensees.
    The Judges discern no theory and no evidence that would support an 
adoption of the so-called ``aggregator discount'' as a separate rate or 
as a separate term. Live365 submitted the testimony of Mr. Floater in 
support of the ``aggregator discount.'' He testified that the asserted 
benefits of an aggregation service flow to the individual webcasters 
who contract to use that service. As Mr. Floater asserted, the 
aggregator offers ``a streaming architecture that can aggregate tens of 
thousands of individual webcasters'' and provides individual webcasters 
with ``broadcast tools and services [that] contain costs. . . .'' 
Floater Corrected WDT at 11-14. Dr. Fratrik provided further testimony 
regarding these aggregation services, noting that they consisted of 
collecting and compiling ``all of the necessary documentation of the 
copyrighted works that are streamed and the number of total listening 
levels for each of these copyrighted works.'' Fratrik WDT at 38.
    The Judges construe these ``aggregator services'' as benefits that 
individual webcasters receive pursuant to their contracts with an 
aggregator--such as Live365. Apparently, through certain economies of 
scale or otherwise, Live365 can provide these services at a lower cost 
per webcaster than the cost each webcaster would incur if it assumed 
the duties individually. That is a real economic benefit to the 
individual webcasters. In turn, Live365 can realize a profit from the 
fees it charges webcasters for these aggregation services, after 
Live365 incurs the costs of providing the aggregation services. Thus, 
the webcasters are enriched by the difference between the higher cost 
of providing these services individually and the contract rate they pay 
to Live365, and Live365 is enriched by the difference between the fee 
it charges the individual webcasters and the cost of providing the 
aggregation services.
    Thus, the economic benefits of these aggregation transactions have 
already been accounted for in the private market through these 
contracts. Accordingly, the benefits and burdens of the services have 
already been addressed privately, and it would constitute a double-
counting if the Judges were to reduce the rate paid by aggregators and 
received by the copyright owners.
    Live365 contended that the discount is appropriate because 
copyright owners receive a benefit from the aggregation of these 
services. However, the copyright owners are not parties to the 
aggregation contracts between Live365 (or any aggregator) and the 
webcasters. To the extent there are external benefits arising from 
those agreements that inure to copyright owners, they are no different 
than any form of benefits that inure to third parties from the 
contractual arrangements of other parties. The Judges cannot compel 
such third parties to incur a cost in exchange for such unsolicited 
benefits.
    This point relates to yet another basis to deny to Live365 a 
reduced royalty rate in exchange for its provision of aggregation 
services. Under the Act, royalty payments unambiguously are to be 
established and paid for ``public performances of sound recordings. . . 
.'' 17 U.S.C. 114(f)(2)(A). The aggregation services provided by 
Live365 are not themselves ``public performances of sound recordings,'' 
but rather are services that are complementary to the provision of 
``public performances of sound recordings.'' Live365 is improperly 
attempting to characterize a distinct complementary service as an 
essential element of utility bundled into the ``public performance of 
sound recordings.'' The complementary--as opposed to bundled--nature of 
the service is underscored by the separate fee received by Live365 from 
the webcasters who voluntarily choose to utilize that service.
    Further, since these aggregation services are not themselves 
``public performances of sound recordings,'' the rationale for the 
statutory license is not triggered. The rationale for the statutory 
license is to cure the perceived market failure that may arise if 
multiple webcasters were required to negotiate for individual licenses 
for a multitude of recordings from the various copyright owners. That 
rationale does not present itself with respect to the aggregation 
services--and certainly, Live365 has not presented any evidence to that 
effect. Alternately stated, if an aggregator desired to internalize the 
benefit its services provided to the record companies, the aggregator 
could attempt to enter into voluntary contracts with the record 
companies. There is no market failure or other issue that would 
preclude or impede such negotiations and contracts. Of course, since 
Live365 indicated that copyright owners already receive these benefits 
as a concomitant to the services provided to the webcasters, there is 
no incentive for a copyright owner to pay for those benefits. (That is 
the economic nature of a positive externality.)
    In sum, Live365 has asked the Judges to provide aggregators with

[[Page 23110]]

remuneration from the copyright owners that is both unavailable under 
the statute and that Live365 was unable to procure in the private 
marketplace. The Judges decline to do so.
d. Conclusions Regarding the Live365 Proposal Based on Dr. Fratrik's 
Model
    For the foregoing reasons, the Judges decline to utilize Live365's 
proposed rate structure or rates to set the rates for the 2011-2015 
rate period or establish a zone of reasonableness within which to set 
the rates.
    Live365 contends that the rates for the 2011-2015 term should be 
set at a level below the 2010 rates to reflect certain factors 
identified in section 114(f)(2)(B)(i) and (ii) of the Act.\25\ However, 
as a general principle, espoused in both Web II and Web I, and absent 
evidence to the contrary, these statutory considerations are deemed to 
have been addressed implicitly within the participant's proposed rate 
structure. See Web II, 72 FR at 24095; Web I, 67 FR at 45244. Live365 
proffered no evidence to support another conclusion.
---------------------------------------------------------------------------

    \25\ These factors are: (i) The promotional or substitution 
effects of the use of webcasting services by the public on the sales 
of phonorecords or other effects of the use of webcasting that may 
interfere with or enhance the sound recording copyright owner's 
other streams of revenue from its sound recordings; and (ii) the 
relative contributions made by the copyright owner and the 
webcasting service with respect to creativity, technology, capital 
investment, cost, and risk in bringing the copyrighted work and the 
service to the public.
---------------------------------------------------------------------------

    In the present case, given the Judges' rejection of the Live365 
rate structure and proposed rates, they have no basis to depart from 
this general principle. Moreover, Live365 provides only a qualitative 
argument for its proposed downward adjustments, rather than a 
quantitative basis for a reduction below the 2010 rates. Further, even 
if qualitative arguments were sufficient in this regard, Live365 has 
not established such a basis for a decrease in webcaster royalty rates.
2. The SoundExchange Rate Proposal
a. Zone of Reasonableness
    SoundExchange sought to demonstrate that its proposed rates were 
within a zone of reasonableness delineated by its economic expert 
witness, Dr. Michael Pelcovits. He constructed his zone of 
reasonableness based upon the following assumptions:
     The rates are intended to be those that would have been 
negotiated in the marketplace between a willing buyer and a willing 
seller;
     The rates are intended to replicate those that would have 
been negotiated in a hypothetical marketplace;
     The hypothetical marketplace is one in which no statutory 
license exists;
     The buyers in this hypothetical marketplace are the 
statutory webcasting services;
     The sellers in this hypothetical marketplace are record 
companies;
     The products sold consist of a blanket license for each 
record company's complete repertoire of sound recordings;
     A per-performance usage fee structure was adopted, rather 
than a fee structure based upon a percentage of the buyer's revenue, a 
per-subscriber fee or a flat fee.\26\
---------------------------------------------------------------------------

    \26\ Dr. Pelcovits did not opine that a percentage-of-revenue-
based fee or any other type of fee structure was economically 
improper. Rather, he indicated that he believed the ``per-
performance approach'' constituted ``precedent'' established in Web 
II, and therefore he did ``not attempt to independently examine the 
merits of different rate structures.'' Pelcovits WDT at 6. As noted 
supra, however, Web II did not create such a precedent, but rather 
noted that the parties' failure of proofs regarding a proposed 
percentage-of-revenue fee structure ``does not mean that some 
revenue-based metric could not be successfully developed'' for use 
in a future proceeding under section 114. Web II, 72 FR at 24090. 
Nonetheless, even though he was mistaken in that regard, Dr. 
Pelcovits relied on that belief as to precedent by declining to 
consider a percent-of-revenue rate structure, or any other rate 
structure. Thus, the Judges can consider only his per-performance 
rate structure, and contrast it with Dr. Fratrik's methodology.
---------------------------------------------------------------------------

    The Judges conclude that these general assumptions by Dr. Pelcovits 
are appropriate when determining the zone of reasonableness within 
which the statutory rates may be set.
b. Benchmark Analysis
    Dr. Pelcovits utilized a ``benchmark'' approach, i.e., an attempt 
to establish rates by comparing, and as appropriate adjusting, rates 
set forth in other agreements that he concluded were sufficiently 
comparable. Dr. Pelcovits's overall benchmark approach to establishing 
a rate structure is consistent with both Web I and Web II. Further, the 
Act itself authorizes the Judges to utilize a benchmark analysis: ``In 
establishing such rates and terms, the Copyright Royalty Judges may 
consider the rates and terms for comparable types of digital audio 
transmission services and comparable circumstances under voluntary 
license agreements described in subparagraph (A).'' 17 U.S.C. 
114(f)(2)(B).
    The Judges, therefore, agree that it is appropriate to rely on 
benchmarks to establish rates in this section 114 proceeding.\27\
---------------------------------------------------------------------------

    \27\ The appropriateness of the benchmark method of analysis was 
called into question by Live365 through the rebuttal expert economic 
testimony of Dr. Michael Salinger, who described the benchmark 
approach as a ``shortcut,'' used ``because it is convenient, not 
because it is correct.'' Salinger WRT at 12-13.
---------------------------------------------------------------------------

    Dr. Pelcovits identified the following two categories of 
benchmarks:

     The then-contemporaneous license fees for statutory 
webcasting services that had been negotiated in two separate 
agreements under the WSA between SoundExchange and two groups of 
broadcasters: terrestrial (over-the-air) broadcasters represented by 
the NAB and Sirius XM;
     The then-contemporaneous license fees that had been 
negotiated between buyers and sellers in the market for interactive, 
on-demand digital audio transmissions.

Pelcovits WDT at 2.
    The WSA Agreements relied upon by Dr. Pelcovits are such voluntary 
agreements. Thus, the Judges may rely upon those agreements as 
benchmarks, assuming the Judges find them to be sufficiently 
comparable, perhaps after any appropriate adjustments.
    The agreements between buyers and sellers in the interactive market 
are not expressly identified under the Act as agreements upon which the 
Judges may rely as benchmarks in a proceeding under section 114. 
However, nothing in the Act suggests that it would be improper for the 
Judges to consider those agreements as potential evidentiary 
benchmarks, or as some other form of probative evidence. In this 
regard, the Act clearly does not constrain the Judges from considering 
any economic evidence (apart from non-precedential WSA agreements) that 
they conclude would be probative of the rate that would be established 
between willing buyers and willing sellers in the hypothetical 
marketplace--regardless of whether that evidence relates to a market 
other than the market for licenses of sound recordings by 
webcasters.\28\
---------------------------------------------------------------------------

    \28\ A wide array of potentially comparable markets can and 
should be considered by the Judges, including those with comparable 
economic characteristics. For example, a market in which copies of 
goods can be reproduced at zero marginal cost may provide relevant 
economic evidence (even if it is not a market for sound recordings), 
whereas, for example, a market for ancillary reporting services that 
benefits buyers and sellers of sound recording licenses (such as 
Live365's aggregator services discussed infra) may be economically 
quite distinct even though it relates to the same parties and 
licenses.
---------------------------------------------------------------------------

    Thus, the Judges conclude that it was proper for Dr. Pelcovits to 
use benchmark analyses in attempting to establish the zone of 
reasonableness for rates in this proceeding.\29\
---------------------------------------------------------------------------

    \29\ Dr. Pelcovits's use of benchmarks in principle, discussed 
in this section, is a separate issue from the issues of whether the 
particular benchmarks he applied were appropriate, whether his 
adjustments to those benchmarks were correct or whether other 
adjustments may be required.

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

[[Page 23111]]

(1) SoundExchange's First Proposed Benchmark: The WSA Agreements
    The first benchmark category relied upon by Dr. Pelcovits is 
comprised of two multi-year agreements that had recently been entered 
into between SoundExchange and two entities: (i) The NAB, covering 
webcasting by over-the-air (terrestrial) radio stations; and (ii) 
Sirius XM, covering webcasting of the music channels broadcast on 
satellite radio. Each of these agreements was entered into in 2009 
pursuant to the WSA and each established royalty rates for the period 
2011 through 2015. Together, these two agreements cover webcasters that 
paid more than 50% of the webcasting royalties received by 
SoundExchange in 2008. Pelcovits WDT at 14.
    Both the NAB and Sirius XM agreements set royalty rates on a per-
performance basis. The rates established by those agreements for the 
license term under consideration by the Judges are set forth below.

------------------------------------------------------------------------
                                                      NAB      Sirius XM
                      Year                         Agreement   Agreement
------------------------------------------------------------------------
2011............................................     $0.0017     $0.0018
2012............................................     $0.0020     $0.0020
2013............................................     $0.0022     $0.0021
2014............................................     $0.0023     $0.0022
2015............................................     $0.0025     $0.0024
------------------------------------------------------------------------

Id. Dr. Pelcovits found these agreements to be ``useful to understand 
the bargaining range over which buyers and sellers would negotiate in 
the hypothetical market for statutory webcasting.'' Id. at 15.
    The Judges agree for the following reasons:

     The rights being sold were precisely the rights at 
issue in this proceeding;
     The buyers (with the broadcasters represented as a 
group by the NAB) share characteristics with the buyers in the 
hypothetical market at issue in this case, but are not identical in 
all respects;
     The sellers are the same copyright owners whose 
copyrights are at issue in this case, albeit represented by 
SoundExchange;
     The copyrights will be used for statutory webcasting 
services; and
     The agreements were contemporaneous with the time at 
which the hearing in this proceeding was conducted.

    The Judges find that additional reasons support the use of the WSA 
Agreements as benchmarks in this proceeding.
    First, no later than September 2009, ``404 entities had opted into 
the NAB Agreement on behalf of several thousand individual stations.'' 
Kessler WDT at 21. Of those broadcasters, approximately 100 were start-
ups, reporting their first instance of webcasting after the execution 
of the NAB Agreement. Ordover WRT at 18. Thus, the rates contained in 
the NAB Agreement clearly were acceptable to a large number of 
webcasters.
    Second, in similar fashion, as of September 2009, several 
commercial webcasters opted into the Sirius XM Agreement. See Live365 
Trial Ex. 25 at 18. The fact that these webcasters, who did not 
participate in the negotiations, nonetheless adopted the terms of the 
agreement is evidence that the negotiated rates and terms were 
reasonable and acceptable to the webcasters.
    Third, it is noteworthy that the webcasters who have entered into 
the NAB Agreement are almost entirely dependent on advertising rather 
than subscription revenue. 4/20/10 Tr. at 283 (Pelcovits). This fact 
tends to address the concern raised by Dr. Michael Salinger, the 
economic expert testifying on rebuttal for Live365, that Dr. 
Pelcovits's interactive services benchmark analysis had failed to 
consider webcasters that were dependent primarily on advertising 
revenue.
    Live365 raised a number of criticisms that it argued diminished the 
value of these WSA Agreements as benchmarks. The Judges address here 
each of Live365's questions.
(a) Were the rates in the WSA agreements increased in exchange for the 
revised lower rates for 2009 and 2010 that were agreed to by the 
parties to the WSA agreements?
    Live365 alleged that the 2011-2015 rates in the WSA agreements are 
higher than they otherwise would be because SoundExchange acquiesced to 
a lowering of the already existing 2009 and 2010 statutory rates for 
the NAB and Sirius XM. Dr. Salinger surmised that SoundExchange must 
have bargained for some form of quid pro quo in the 2011-2015 rate 
structure in exchange for a reduction in the rates already established 
for 2009 and 2010. Salinger WRT at ]] 55-56. Live365 presented no 
evidence of such a bargain, however.
    On the other hand, Dr. Pelcovits opined that SoundExchange's 
reduction of the 2009 and 2010 rates, as permitted under the WSAs, was 
analogous to a ``signing bonus''--offered to induce the NAB and Sirius 
XM to settle early. That assertion, too, raised a factual question 
rather than an issue that required expert economic testimony. 
SoundExchange likewise did not proffer testimony or any other evidence 
to identify the benefit that SoundExchange received by reducing the 
statutory 2009 and 2010 webcasting rates.
    Neither Dr. Salinger nor Dr. Pelcovits proffered any empirical 
evidence to support their respective hypotheses as to the relationship, 
vel non, between the reduction in the 2009-2010 rates and the rates for 
2011-2015 in the WSA agreements. Neither did the respective parties 
proffer testimony from their other witnesses that would shed light upon 
the negotiating strategies of the parties as they related to this 
issue.
    In the absence of such factual or economic evidence, the Judges 
cannot reach any conclusion regarding the relationship between the 
reduction of the 2009 and 2010 webcasting rates and establishment of 
the voluntary rates for 2011-2015 in the WSA agreements. Accordingly, 
the reduction in the 2009 and 2010 rates charged by SoundExchange to 
the NAB and Sirius XM cannot serve to diminish the value of the rates 
in the WSA Agreements as benchmarks in this proceeding.
(b) Does the grant by the four major record companies to the NAB of a 
waiver of the ``Sound Recording Performance Complement'' rules diminish 
the probative value of the NAB agreement as a benchmark?
    Live365 asserts that the waiver by the four major record companies 
\30\ of the ``sound recording performance complement'' for the benefit 
of the NAB in its WSA Agreement undermines the value of those rates as 
benchmarks. It is correct that, contemporaneous with entering into its 
WSA Agreement with SoundExchange, the NAB negotiated ``performance 
complement waivers'' with each of the major record companies. Pelcovits 
WDT at 20 n.21. These waivers allowed the NAB broadcasters to simulcast 
their broadcasts on the Internet even though the number of plays by an 
artist or from an album might exceed the allowable levels under section 
114(j)(13) of the Act.\31\ Live365, through its economic expert, Dr. 
Fratrik, opined that the waiver of the ``performance complement'' 
provided additional value to the NAB broadcasters, a value that must be 
bundled implicitly into the purported benchmark per-performance rates 
contained in the NAB/SoundExchange Agreement. Dr. Fratrik opined that 
if the terrestrial broadcasters

[[Page 23112]]

covered by the NAB/SoundExchange Agreement had been bound by the 
``performance complement,'' they would have been required to modify 
their webcasts, as opposed to simply simulcasting their terrestrial 
broadcasts. Fratrik WDT at 43-44.
---------------------------------------------------------------------------

    \30\ As of the date of this Determination on remand, there are 
three major record labels, following the merger of EMI and Sony.
    \31\ In their role as terrestrial broadcasters, the NAB 
broadcasters were not bound by the ``performance complement,'' but 
in their role as webcasters they would have been subject to the 
restriction without the waiver.
---------------------------------------------------------------------------

    However, neither Dr. Fratrik nor any other witness provided any 
empirical evidence to indicate the extent, if any, of any additional 
value realized by the NAB broadcasters in exchange for the waiver of 
the performance complement rules. Thus, the Judges are asked, in 
effect, to unbundle the per-performance rates in the NAB/SoundExchange 
Agreement, without any evidence as to the value of this ``stick'' 
within that bundle, i.e., the waiver of the performance complement 
rules.
    SoundExchange disputed the assertion that the waiver of the 
performance complement rules should reduce the efficacy of the NAB 
agreement as a benchmark. Even so, Dr. Pelcovits does admit the 
existence of some value in the waiver of the performance complement 
rules:

    The performance complement waivers are uniquely valuable to 
broadcasters, whose over-the-air programming is not subject to a 
sound recording copyright and therefore not subject to the 
performance complement. The waiver allows these broadcasters to re-
transmit their terrestrial signal without having to alter the 
programming that they created primarily for a use not subject to the 
performance complement.

Pelcovits WDT at 20 n.21 (emphasis added).
    Dr. Pelcovits notes though that ``[t]he market value of the waiver 
appears to be very small, since Sirius XM, with no such waiver, agreed 
to rates that are virtually identical over the life of the contract.'' 
Id. Dr. Pelcovits is correct. The differences between the per-
performance rates in the NAB/SoundExchange Agreement and the Sirius XM/
SoundExchange Agreement for the 2011-2015 rate period are illustrated 
on the following table.

------------------------------------------------------------------------
                                                   Sirius XM
                 Year                    NAB Rate     rate    Difference
------------------------------------------------------------------------
2011..................................    $0.0017    $0.0018    -$0.0001
2012..................................     0.0020     0.0020      0.0000
2013..................................     0.0022     0.0021     +0.0001
2014..................................     0.0023     0.0022     +0.0001
2015..................................     0.0025     0.0024     +0.0001
------------------------------------------------------------------------

    Thus, the average annual difference in the per-performance rates 
between the two agreements is $0.00004. Accordingly, the Judges 
conclude that the waiver of the performance complement rule has no 
discernible impact on the value of the WSA Agreements as benchmarks.
(c) Does it matter if the terrestrial broadcasters covered by the NAB/
SoundExchange Agreement were able to pay a higher rate because their 
webcasting costs are lower than the costs of pure webcasters?
    Dr. Fratrik opined that the terrestrial commercial radio 
broadcasters have a vastly different cost structure than pure play 
webcasters, which allows them to pay higher royalty rates for sound 
recordings. Specifically, Dr. Fratrik noted:

     Terrestrial radio broadcasters who simulcast on the web 
their over-the-air transmissions have already incurred the necessary 
programming costs.\32\
---------------------------------------------------------------------------

    \32\ The webcasters on whose behalf NAB negotiated a deal with 
SoundExchange are predominantly simulcasters, i.e., entities that 
offer terrestrial broadcasts of their programming and simultaneously 
transmit that same programming on the Internet. Ordover WRT ] 51.
---------------------------------------------------------------------------

     Terrestrial commercial radio stations can promote their 
Web site on their own broadcast stations, reducing their advertising 
costs.\33\
---------------------------------------------------------------------------

    \33\ This point seems to confuse economic cost with out-of-
pocket cost. If a broadcaster foregoes paid advertising from a third 
party in order to air an advertisement for its own webcasts, that 
broadcaster has incurred an opportunity cost equal to the 
advertising revenue that the third party would have paid.
---------------------------------------------------------------------------

     Terrestrial radio broadcasters can use the sunk cost of 
a pre-existing sales force to sell online advertising.
     Terrestrial radio broadcasters have audiences more 
concentrated in the same geographic area than pure webcasters, thus 
allowing the former to realize more revenue selling advertising to 
local advertisers.

Fratrik WDT at 41-42. Consequently, Dr. Fratrik concluded ``terrestrial 
broadcasters are more willing to pay higher royalty fees for webcasting 
as they are able to generate greater profits from that industry.'' Id. 
at 42.
    Live365 has not quantified or otherwise estimated the monetary 
value of these differences. Thus, even if this argument had substantive 
merit, the Judges could not make any specific adjustment of the rates 
in the NAB/SoundExchange Agreement to reflect these theoretical cost 
advantages.
    More importantly, however, the recitation of these advantages 
inuring to the benefit of the NAB simulcasters is simply another way of 
stating that their business models afford them the synergy to expand 
horizontally across the landscape of differentiated sound recording 
sub-markets by paying a higher per-performance fee than webcasters with 
a more costly and less synergistic business model.\34\ As noted in Web 
I, the Act does not provide for a consideration of ``the financial 
health of any particular service'' when establishing rates. 67 FR at 
45254.
---------------------------------------------------------------------------

    \34\ SoundExchange's rebuttal economic witness, Dr. Janusz 
Ordover, makes an important point in his critique of Dr. Fratrik's 
cost differential argument--one that relates to the rate structure 
analysis undertaken earlier in this Determination. Specifically, Dr. 
Ordover opines that SoundExchange would not offer pure webcasters a 
lower rate in light of their higher cost structures unless 
SoundExchange could ``price discriminate at the level of license.'' 
Ordover WRT at 15. In this context, Dr. Ordover then identifies the 
pros and cons of marginal cost pricing, as well as the impact of 
such price discrimination upon the subscription rates of the 
ultimate consumers, the returns to licensors, and the shifting of 
revenues between and among different webcasters. Id. at 14-16. These 
are the types of issues that would need to be addressed and 
supported by empirical analyses in a proceeding in which a party had 
proposed a rate premised on a form of price discrimination, such as 
a percentage-of-revenue based fee.
---------------------------------------------------------------------------

(d) Did the WSA agreements have the design, intent, and effect of 
raising the input costs of smaller webcasters?
    Live365, through Dr. Salinger, opined that the parties to the WSA 
agreements set rates above market rates for 2011-2015 because they had 
strategically intended to use those rates as benchmarks, and thereby 
raise the costs of their rivals, i.e., all other webcasters. Salinger 
WRT at 23. As Dr. Salinger notes, those parties had the power to 
influence the impact of those contractual rates, because they could 
elect--as they ultimately did--to permit these agreements and rates to 
be made available as potential precedents. Id. at 24.
    This argument is theoretically plausible, as noted in the articles 
cited by Dr. Salinger. Id. at 24 (citing Steven Salop and David 
Scheffman, Raising Rivals' Costs, 73 Am. Econ. Rev. 267-71 (1983); 
Thomas Krattenmaker and Steven Salop, Anticompetitive Exclusion: 
Raising Rivals' Costs to Achieve Power over Price, 96 Yale L.J. 209 
(1986)). However, Live365 has not provided any empirical or other 
evidence that would tend to prove the existence of such strategic 
coordination or conduct in this proceeding.
    In the absence of any such evidence, the Judges cannot simply 
assume a multi-party conspiracy among SoundExchange, the NAB, and 
Sirius XM to increase the rates charged to the NAB and Sirius XM, in 
the hope that the Judges would utilize those WSA rates to establish the 
statutory rates. Although the Judges acknowledge that, generally, 
explicit or tacit collusion may exist among participants in 
concentrated industries, that general proposition cannot serve as the 
basis for an ultimate finding of specific tri-partite collusion, absent 
an adequate factual record.

[[Page 23113]]

(e) Were the rates in the WSA agreements inflated to reflect litigation 
cost savings by the NAB and Sirius XM?
    Live365 asserted that the rates in the WSA Agreements are higher 
than market rates because they reflect the litigation cost saved by the 
NAB and Sirius XM of foregoing a rate proceeding and its attendant 
expenses. Live365 PFF ]] 322-326. Further, Live365 asserted that this 
litigation cost/opportunity cost saving only affected the settling 
webcasters, not SoundExchange, because the latter would be incurring 
litigation costs regardless, since other webcasters (such as Live365) 
remained as contesting parties at the time of settlement. Live365 PFF ] 
283.
    SoundExchange disputed these assertions on several grounds.
    First, SoundExchange asserted that the principal reason for the WSA 
Agreements was that the parties had ``a high degree of confidence that 
the Judges would establish rates consistent with the willing buyer/
willing seller construct . . . .'' SX PFF ] 282. Dr. Ordover explained 
that, consequently ``neither party likely would be willing to incur 
litigation costs in the event of a disagreement . . . .'' Ordover WRT 
at 16. This is certainly one explanation to counter Live365's 
assumption that the NAB and Sirius XM paid a rate premium to avoid 
litigation costs. The Judges recognize that rational parties will 
attempt to predict the determination of any tribunal, and that they 
will tend to settle if their respective predictions are sufficiently 
proximate.\35\
---------------------------------------------------------------------------

    \35\ However, SoundExchange overstates the logic of this point. 
The mere fact that two adversarial parties reach a settlement 
premised upon their mutual prediction of the Judges' future 
determination does not mean that they have correctly predicted (with 
``a high degree of confidence'' no less) that the rate the parties 
settled upon would be the same as the rates the Judges ultimately 
would have established. It is a sufficient inducement for the 
parties to settle if they agree on their prediction, not that their 
prediction be correct. It would be hopelessly circular if the Judges 
were to put their imprimatur on rates negotiated in a settlement 
merely on the assumption that the parties were able to predict how 
the Judges would apply the statutory standards. Such an argument 
would essentially require the Judges to abdicate their 
responsibilities and defer to the settling parties, whose self-
declared rational expectations as to the Judges' future 
determination would be deemed both prescient and dispositive.
---------------------------------------------------------------------------

    Second, SoundExchange asserted that it too had an incentive to 
avoid litigation costs, and that such an incentive offset the potential 
impact of any similar incentive on the settling webcasters with regard 
to the rates contained in the WSA Agreements. Ordover WRT at 5, 16-17; 
8/2/10 Tr. at 351 (Ordover) (threat of litigation ``works on both 
sides''). However, Live365 is correct in its claim that SoundExchange 
still would have been required to participate in a rate proceeding 
against other contesting webcasters. Nonetheless, SoundExchange did 
avoid the potential impact of arguments that would have been made by 
the NAB and Sirius XM that might have resulted in lower rates. Instead, 
SoundExchange was required ultimately to contest the claims of only one 
webcaster, Live365.
    In any event, neither party presented evidence to the Judges 
regarding how to quantify the relative opportunity costs saved by 
SoundExchange and/or the settling webcasters. For all these reasons, 
the Judges cannot adjust the marketplace rates to reflect any such 
impact arising out of the litigation costs allegedly avoided by the WSA 
Agreements.\36\
---------------------------------------------------------------------------

    \36\ Two ancillary points were made by the respective parties 
with regard to the alleged impact of litigation costs: Live365 
asserted that the settling webcasters did not have the same capacity 
to absorb litigation costs as SoundExchange, but there was no 
evidence that indicated such a disparity existed or, even if it did, 
how it affected the rates upon which the parties settled. Fratrik 
WDT at 43; Ordover WRT at 17. SoundExchange argued that the settling 
parties had additional options beyond settle or litigate--they could 
either elect not to participate in the rate proceeding or decide not 
to webcast. SX PFF ] 284. Both of those supposed ``options'' seem 
extreme.
---------------------------------------------------------------------------

(f) Are the rates in the WSA agreements reflective of SoundExchange's 
monopoly power?
    Live365 asserted that the rates in the WSA Agreements reflect the 
monopoly power of the single seller in those two contracts, i.e., 
SoundExchange. Live365 PFF ] 286. As Live365 correctly notes, in the 
``hypothetical market'' that the Judges are statutorily required to 
consider, the hypothetical sellers are the several record companies 
rather than a single monopolist. Web II, 72 FR at 24087, Web I, 67 FR 
at 45244.
    Dr. Salinger, Live365's economic rebuttal witness, testified that 
it is ``a very general principle of economics'' that the presence of a 
monopolist ``poses a risk of increased prices.'' Salinger WRT at 26. 
SoundExchange's rebuttal economic witness, Dr. Ordover, concurred, 
acknowledging that SoundExchange ``may [have] additional bargaining 
power'' because of its status as the single seller. Ordover WRT at 22.
    The power that these two economists acknowledged was the well-
understood market power of a (single price) monopolist to set a price 
at a level higher than would be set in a perfectly competitive market, 
while also restricting the quantity sold to the level at which marginal 
revenue equals marginal cost. See, e.g., Krugman & Wells, supra, at 
367; Edwin Mansfield & Gary Yohoe, Microeconomics 364-65 (11th ed. 
2004).
    It is not at all apparent, however, that the market power of 
SoundExchange to command a high rate would be appreciably greater (if 
at all) than the power of the major record companies, who owned 
approximately 85% of supply (the sound recordings) and therefore 
comprise an oligopoly. 4/20/10 Tr. at 299 (Pelcovits). As stated by Dr. 
Pelcovits:

    [N]egotiation of the WSA Agreements by SoundExchange does not 
significantly alter the market power equation. Each record company 
has a unique catalog of sound recordings that are highly valued (or 
even necessary inputs) to any webcasting service. The individual 
record companies, as a consequence, have a degree of market power.

Pelcovits WDT at 17 (emphasis added). Dr. Pelcovits's testimony is 
consonant with contemporary economic understanding that oligopoly 
pricing behavior can mimic monopoly pricing decisions.
    Economists once believed that oligopoly pricing may have been 
essentially indeterminate. More modern game theory analyses recognize, 
however, the strong potential for tacit collusion among long-standing 
oligopolists (such as the major record companies), after repeated ``tit 
for tat'' pricing maneuvers, that will cause oligopolistic pricing to 
approach monopoly pricing:

    [W]hen oligopolists expect to compete with each other over an 
extended period of time, each individual firm will often conclude 
that it is in its own best interest to be helpful to the other firms 
in the industry. So it will restrict its output in a way that raises 
the profits of the other firms, expecting them to return the favor. 
. . . [T]hey manage to act as if they had . . . an agreement. When 
this happens, we say that firms engage in tacit collusion.

Krugman & Wells, supra, at 401; see Hal Varian, Intermediate Economics: 
A Modern Approach 531 (8th ed. 2010) (``The threat implicit in tit for 
tat may allow the firms to maintain high prices.''). Such tacit 
collusion can lead to pricing by oligopolists at the monopoly level. 
See, e.g., L. Kaplow, On the Meaning of Horizontal Agreements in 
Competition Law, 99 Cal. L. Rev. 683, 811 (2011) (``oligopoly pricing 
is akin to monopoly pricing.'').
    Thus, consistent with Dr. Pelcovits's testimony, theoretically 
there could be no important difference between the bargaining power of 
the four major record companies and SoundExchange. However, as 
discussed infra, the evidence in this proceeding does not

[[Page 23114]]

indicate that the rates in the WSA Agreements were so high as to enable 
SoundExchange to extract monopoly rents from webcasters.\37\
---------------------------------------------------------------------------

    \37\ An oligopolistic marketplace rate that did approximate the 
monopoly rate could be inconsistent with the rate standard set forth 
in 17 U.S.C. 114(f)(2)(B), as that standard has been construed by 
the D.C. Circuit and the Librarian of Congress. The D.C. Circuit has 
held that this statutory section does not oblige the Judges to set 
rates by assuming a market that achieves ``metaphysical perfection 
and competitiveness.'' Intercollegiate Broadcast System, Inc. v. 
Copyright Royalty Board, 574 F.3d 748, 757 (D.C. Cir. 2009). Rather, 
as the Librarian of Congress held in Web I, the ``willing seller/
willing buyer'' standard calls for rates that would have been set in 
a ``competitive marketplace.'' 67 FR at 45244-45 (emphasis added). 
See also Web II, 67 FR at 24091-93 (explaining that Web I required 
an ``effectively competitive market'' rather than a ``perfectly 
competitive market.'' (emphasis added)). Between the extremes of a 
market with ``metaphysically perfect competition'' and a monopoly 
(or collusive oligopoly) market devoid of competition there exists 
``[in] the real world . . . a mind-boggling array of different 
markets,'' Krugman & Wells, supra, at 356, all of which possess 
varying characteristics of a ``competitive marketplace.'' As 
explained in the text, infra, in this proceeding the evidence 
demonstrates that sufficient competitive factors existed to permit 
the WSA Agreements to serve as useful benchmarks, and does not 
demonstrate that the rates in the WSA Agreements approximated 
monopoly rates.
---------------------------------------------------------------------------

(i) The NAB's Countervailing Market Power
    As Dr. Ordover noted, the NAB, which negotiated on behalf of a 
group of broadcasters, enjoyed a degree of bargaining power on the 
buyers' side during its negotiations with SoundExchange. Ordover WRT at 
23; see also 7/28/10 Tr. at 129-30 (Salinger) (acknowledging balance of 
power in this context). This power arose from the fact that, at the 
time of the WSA Agreement negotiations, the NAB broadcasters had 
accounted for over 50% of the royalty payments to SoundExchange in the 
immediately preceding calendar year. Ordover WRT at 23; Live365 Trial 
Ex. 25. As Dr. Ordover testified, ``[s]uch added market power on the 
buyer side tends to mitigate, if not fully offset, additional leverage 
that SoundExchange might bring to the negotiations.'' Ordover WRT at 
23; Web II, 72 FR at 24091 (``[T]he 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.'')
(ii) The Availability of a Rate Setting Proceeding
    The monopoly power of SoundExchange was compromised by the fact 
that the NAB or any webcasters negotiating with SoundExchange could 
have chosen instead to be subject to the rates to be set by the Judges. 
Ordover WRT at 23. Dr. Ordover explained that ``[a]t some point, buyers 
such as the NAB members would simply elect to seek rates established by 
the Judges--which would be free of any potential cartel effects--rather 
than voluntarily agree to pay above-market rates.'' Ordover WRT at 23; 
see Salinger WRT at 27 (buyers can resort to the court if the 
collective seeks to charge more than each individual member could 
charge).
(iii) The Evidence Did Not Demonstrate That the Individual Record 
Companies Necessarily Would Have Negotiated a Lower Rate Than 
SoundExchange
    As Dr. Ordover explained, the nature of the market indicated that 
SoundExchange might have been in a position to negotiate rates that 
were actually lower than the rates the record companies would have 
negotiated individually. More particularly, the existence, vel non, of 
SoundExchange's power to set higher prices ``depends partially on the 
assumption one makes about whether a webcaster requires access to the 
repertoire of all four major record companies in order to operate an 
economically viable business, or only to a subset.'' Ordover WRT at 23-
24.
    As Dr. Ordover further explained, if the repertoires of all four 
major record companies were each required by webcasters (i.e., if the 
repertoires were necessary complements) and webcasters were required to 
negotiate with each record company individually, then each record 
company would have an incentive to charge a monopoly price to maximize 
its profits without concern for the impact on the market writ large. 
That is, while these higher prices would constitute profits for the 
record company receiving them, they would constitute higher monopoly 
costs (incurred four times--paid by webcasters to each of the four 
record companies). The webcasters would pass on the higher costs to 
listeners, thus reducing the quantity of sound recordings made 
available to end users. Ordover WRT at 25-26.
    By contrast, SoundExchange, as a collective, would internalize the 
impact of the complementary nature of the repertoires on industry 
revenue and thus seek to maximize that overall revenue. This would 
result in lower overall rates compared to the situation in which the 
individual record companies negotiated separately. Ordover WRT at 27.
    Of course, this argument would be valid only if the repertoires of 
the several record companies indeed were complements rather than 
substitutes. If it was sufficient for webcasters to obtain only the 
licenses for one (or less than all four) of the major record companies, 
then separate negotiations with individual record companies (absent 
collusion, tacit or otherwise) could lead to competitively lower 
royalty rates.
    The parties presented no evidence from which the Judges could 
conclude that the repertoires of the respective record companies were 
complements or substitutes, or, perhaps, complementary to some degree 
and substitutional to some degree.\38\ Thus, the Judges cannot conclude 
that SoundExchange necessarily wielded a level of pricing power 
sufficient to affect the use of the WSA Agreements as benchmarks.\39\
---------------------------------------------------------------------------

    \38\ In Web II, the Judges found that there was testimony 
sufficient to indicate that the several repertoires were substitutes 
rather than complements. 72 FR at 24093. The contesting parties in 
this proceeding did not provide the Judges with evidence sufficient 
to make a factual finding as to this issue.
    \39\ The Judges reject an additional argument made by 
SoundExchange that the WSA Agreements could be construed as 
competitive by comparing the prices negotiated by the major record 
companies in their agreements with ``custom radio services'' to the 
lower prices in the WSA Agreements. Pelcovits WDT at 19. The Judges 
agree with Dr. Salinger's critique that a comparison of rates for 
``custom radio services'' and noninteractive webcasters is not an 
``apples-to-apples'' comparison, because ``custom radio'' adds 
additional value in terms of substitutability for the purchase of 
music and adds a level of control for the listener. Salinger WRT at 
26. Further, even Dr. Pelcovits acknowledges that custom radio 
service involves a ``degree of interactivity . . . and therefore is 
not necessarily comparable to noninteractive webcasting.'' Pelcovits 
WDT at 32. Thus, this issue posits at least two potential 
explanatory variables that could explain why the record companies 
negotiated higher rates for custom radio than SoundExchange 
negotiated for noninteractive services in the WSA Agreements: (i) 
The monopoly or oligopoly character of the seller(s); and (ii) the 
differentiated nature of the two services. Absent any empirical or 
other evidence that indicates how each of these explanatory 
variables relates to the pricing differential, SoundExchange's 
attempt to rely on the pricing differential as probative of a more 
competitive rate must fail.
---------------------------------------------------------------------------

(g) Conclusion Regarding the WSA Agreements
    On balance, the Judges conclude that the arguments made by Live365 
as to why the WSA Agreements cannot serve as benchmarks are not 
persuasive. Therefore, the Judges conclude that the evidence permits 
these two agreements to serve as benchmarks in this proceeding.
(2) SoundExchange's Second Proposed Benchmark: The Adjusted Interactive 
Subscription Service Rate
    In addition to its WSA Agreements benchmark, SoundExchange relied 
on Dr. Pelcovits's analysis of another purported benchmark--the market 
for interactive webcasting of digital

[[Page 23115]]

performances of sound recordings. According to Dr. Pelcovits, that 
interactive market is comparable to the noninteractive market at issue 
in this proceeding for the following reasons:
     Both markets have similar buyers;
     Both markets have similar sellers;
     Both markets utilize a blanket license in sound 
recordings;
     Both markets are input markets;
     Both markets have a demand schedule for these inputs that 
is derived from the demand of ultimate consumers; and
     Both markets deliver the sound recordings via the 
Internet.

Pelcovits WDT at 3; 4/19/10 Tr. at 126 (Pelcovits).
    In the interactive market, the rates for sound recordings are not 
subject to the statutory license. Rather, in the interactive market, 
the rates for sound recordings are set through marketplace negotiations 
between the owners of the sound recordings, as sellers/licensors, and 
the individual interactive webcasters, as buyers/licensees.
    The major difference between the two markets is the role of the 
ultimate consumer in selecting the sound recordings for listening. In 
the interactive market (as the adjective connotes), the ultimate 
consumer essentially decides which sound recordings he or she will 
receive.\40\ By contrast, in the noninteractive market (as the 
adjective again connotes), the consumer plays a more passive role, and 
the webcaster offers the consumer music that the webcaster anticipates 
the listener might enjoy (much like radio). Compare 17 U.S.C. 114(j)(6) 
with 17 U.S.C. 114(j)(7).
---------------------------------------------------------------------------

    \40\ The ability of the ultimate consumer to choose to listen to 
specific sound recordings renders that decision analogous to the 
decision to purchase music digitally or otherwise. Thus, as noted in 
the legislative history of the Digital Performance Right in Sound 
Recordings Act, that statute permits the owners of sound recordings 
to bargain directly with each interactive webcaster over the price 
of each transmission, in the same manner as if the parties were 
negotiating the price of a digital download for outright purchase. 
See H.R. Rep. No. 104-274 at 14 (1995) (``Of all the new forms of 
digital transmission services, interactive services are most likely 
to have a significant impact on traditional record sales, and 
therefore pose the greatest threat to the livelihoods of those whose 
income depends upon revenues derived from traditional record 
sales.'').
---------------------------------------------------------------------------

    Thus, it is necessary to isolate the value of such consumer choice, 
i.e., the utility of interactivity, and subtract that value from any 
estimate of the value of sound recordings in the interactive market, in 
order to make that value more comparable to the value in the 
noninteractive market.
    Dr. Pelcovits attempted to make such an adjustment in his analysis 
(as well as other adjustments discussed infra), which resulted in his 
proposed per-performance rate of $0.0036 per play for a statutory 
noninteractive webcaster.
    The Judges conclude, as the Judges concluded in Web II, that such 
an adjusted benchmark constitutes the type of benchmark that the Act 
permits (but does not require) the Judges to consider. However, the 
fact that this is an appropriate type of benchmark to be considered 
does not necessarily mean that any particular application of the 
benchmark will be of assistance in a given proceeding. Rather, the 
Judges must consider the application of such a benchmark, and decide 
whether to adopt or reject it in toto or whether it is necessary to 
adjust the proposed benchmark.
    As explained infra, the Judges have concluded that the interactive 
benchmark proposed by Dr. Pelcovits on behalf of SoundExchange is of 
assistance in establishing a zone of reasonableness in this proceeding, 
but only after making certain significant adjustments to that proposed 
benchmark.
(a) The Methodology Utilized by Dr. Pelcovits in His Interactive 
Benchmark Analysis
    Dr. Pelcovits opined that ``the interactive, on-demand music 
services [are] the best benchmark to use for the purpose of setting 
rates for statutory webcasting services in this proceeding.'' Pelcovits 
WDT at 23. Dr. Pelcovits testified, ``it is reasonable to predict that 
the ratio of per-subscriber royalty fees to consumer subscription 
prices will be essentially the same in both the benchmark and target 
markets.'' Pelcovits WDT at 23; see 4/20/10 Tr. at 277-78 (Pelcovits). 
The theory upon which Dr. Pelcovits relied to make this prediction was 
premised on the economic concept of ``derived demand.'' As Dr. 
Pelcovits testified, ``webcasters demand or have a need for the music 
performance because that's what their customers demand.'' 4/19/10 Tr. 
at 132 (Pelcovits); Pelcovits WDT at 23 (``I believe it is reasonable 
to predict that the ratio of per-subscriber royalty fees to consumer 
subscription prices will be essentially the same in both the benchmark 
and target markets.'').
    However, in order to use the rates in this interactive benchmark 
market to develop rates in the target market, Dr. Pelcovits also 
concluded that he was required to make adjustments ``to account for the 
differences between the benchmark and target markets.'' Pelcovits WDT 
at 22; 4/29/10 Tr. at 127 (Pelcovits). Specifically, Dr. Pelcovits 
adjusted (i) the interactive benchmark rates to take into account the 
fact that there are more plays per subscriber in the noninteractive 
market; and (ii) the subscription prices in the interactive market to 
remove the value of interactivity. Pelcovits WDT at 23.
(i) The Marketplace Agreements Considered by Dr. Pelcovits
    Dr. Pelcovits obtained 214 agreements between certain interactive 
webcasters and the four major record companies, viz., Universal Music 
Group, Sony Music Entertainment, Warner Music Group, and EMI, that 
spanned the period from approximately 2004 through 2009, with an 
emphasis on contracts that were created in the most recent three years. 
Pelcovits WDT, App IV. Under the terms of these agreements, Dr. 
Pelcovits found that the interactive webcasters generally ``pay 
royalties on the basis of the greatest of three measures: A per-play 
rate; a percentage of gross revenue rate; and a per-subscriber fee.'' 
Pelcovits WDT at 29; 4/29/10 Tr. at 129-30 (Pelcovits).
    Dr. Pelcovits had available for consideration, inter alia, two 
types of interactive webcasting models: (i) Subscription on-demand 
interactive streaming services and (ii) advertising-supported 
(nonsubscription) on-demand streaming services.\41\ SoundExchange 
explained the difference between these models in the following manner, 
through the testimony of its industry witness:
---------------------------------------------------------------------------

    \41\ Dr. Pelcovits also reviewed agreements between ``custom 
radio'' services and the four major record companies, agreements 
that, according to SoundExchange's witnesses, occupy a functional 
gray area between interactive and noninteractive services. See 
McCrady WDT at 16. Dr. Pelcovits made note of such agreements in his 
testimony, including a particular reference to the agreement between 
WMG and one such custom radio service, Slacker Premium. As discussed 
infra, Dr. Pelcovits needed data regarding the number of plays by 
Slacker Premium to serve as a proxy for the number of plays by 
noninteractive webcasters, because such data was not available for 
clearly noninteractive services. Pelcovits WDT at 32.
---------------------------------------------------------------------------

     Subscription on-demand interactive streaming.
    This type of webcasting allows a paying subscriber to request the 
exact song he or she wishes to hear. McCrady WDT at 12. In addition, 
most of these services allow their subscribers to conditionally 
download requested songs to their personal computer and sometimes to a 
portable storage device, such as an iPod. Id. These downloads remain 
available for listening at any time by a subscriber, provided that the 
subscription remains active. Id.
     Advertising-supported (nonsubscription) on-demand 
interactive streaming.
    This type of webcasting is the same as subscription on-demand 
interactive

[[Page 23116]]

streaming except the listener does not subscribe and receives gratis 
the songs he or she wishes to hear. The webcaster sells advertising on 
the site and the listener hears the advertising as well as the specific 
songs requested. Mr. McCrady described these interactive webcasting 
services that derive their revenue from advertising alone and not from 
subscriptions to be ``experimental'' and not yet ``mature.'' 4/22/10 
Tr. at 663 (McCrady); McCrady WDT at 15.
    Dr. Pelcovits ultimately elected to ignore the advertising-
supported (nonsubscription) on-demand interactive streaming in his 
analysis because, in his opinion, ``it is more straightforward to infer 
differences in consumer willingness-to-pay (and by extension how much 
the webcaster would be willing to pay for the license) from observed 
prices for subscription services.'' Pelcovits WDT at 24.
(ii) Dr. Pelcovits's Calculation of the Per-Play Rate in the Benchmark 
Interactive Subscription Market
    Dr. Pelcovits proceeded to calculate the ``effective per play 
rate'' paid under the contracts between the benchmark interactive 
services and the four major record companies. To do so, he obtained 
data from the major record companies that revealed:

     The revenue reported by the interactive subscription 
services to the major record companies; and
     The number of unique plays those services reported to 
the major record companies.

Pelcovits WDT at 30; 4/29/10 Tr. at 128 (Pelcovits). The revenue data 
that Dr. Pelcovits analyzed represented not merely revenue paid under 
the per-performance rate structure in the interactive contracts, but 
rather all revenue, regardless of whether that revenue had been paid 
pursuant to one of the other structures contained in those contracts. 
Pelcovits WDT at 30.
    As noted at the outset of this determination, given Dr. Pelcovits's 
assumption that only a per-performance (i.e., per play) royalty rate 
structure would pass muster with the Judges, he only proposed a per-
play royalty rate. Accordingly, Dr. Pelcovits determined an 
``effective'' per-play royalty rate by combining the revenue reported 
and paid pursuant to the percentage-of-revenue structure and the per-
play structure for the purposes of his analysis. Pelcovits WDT at 30.
    The data reviewed by Dr. Pelcovits also showed that the percentage 
of plays on the interactive services attributable to the four major 
record companies was approximately 85%. 4/20/10 Tr. at 299 (Pelcovits). 
Thus, by considering only the data from the four major record 
companies, Dr. Pelcovits did not consider 15% of the sellers in his 
benchmark market.
    With regard to the number of plays per subscriber for his benchmark 
market, Dr. Pelcovits counted ``the total number of unique plays of 
recorded music owned (or distributed) by the four major record 
companies reported by the interactive webcasting service(s).'' 
Pelcovits WDT at 30; 4/19/10 Tr. at 130-31 (Pelcovits). Dr. Pelcovits 
calculated the average number of monthly plays by these interactive 
subscription services to be 287.37 per subscriber. Pelcovits WDT at 31. 
To derive the effective per-play rate in the interactive market, Dr. 
Pelcovits then divided the total revenue collected by the record 
companies by 287.37, i.e., the total number of unique plays. This 
division resulted in an effective per-play rate for the benchmark 
interactive subscription service market of $0.02194 per play. Id.
(iii) Dr. Pelcovits's Adjustments to the $0.02194 Per-Play Rate in the 
Benchmark Interactive Subscription Market
    Dr. Pelcovits believed that it was necessary to make certain 
adjustments to the interactive benchmark streaming per-play rate before 
it could be applied to the noninteractive streaming market. In 
particular, Dr. Pelcovits adjusted for:

     The higher usage intensity (number of plays per month) 
by subscribers of noninteractive services compared to subscribers of 
interactive services; and
     The value that consumers place on the greater 
interactivity offered by the on-demand services compared to 
statutory services that do not offer that function.

Pelcovits WDT at 3, 31.\42\
---------------------------------------------------------------------------

    \42\ Dr. Pelcovits made a third adjustment in an attempt to 
account for the substitutional effect of the two types of services 
on CD and permanent download sales. Pelcovits WDT at 35-36. As 
explained infra, the Judges find that this adjustment is subsumed 
within his willing seller/willing buyer analysis.
---------------------------------------------------------------------------

(a) The Adjustment for Usage Intensity/Number of Monthly Plays
    Dr. Pelcovits's first adjustment sought to account for the fact 
that there were a greater number of plays by subscribers of 
noninteractive services than by subscribers on interactive statutory 
services. Pelcovits WDT at 31; see 4/19/10 Tr. at 139-41 (Pelcovits).
    While, as noted supra, Dr. Pelcovits was able to obtain data 
regarding the number of interactive plays, he admitted to difficulty in 
calculating the number of noninteractive plays. As Dr. Pelcovits 
candidly acknowledged, the noninteractive services ``do not report the 
number of subscribers in public documents or in data provided to the 
record companies or SoundExchange.'' Pelcovits WDT at 31.
    In light of these difficulties, Dr. Pelcovits turned to data 
provided to the record companies for the subscription custom radio 
service Slacker Premium. Pelcovits WDT at 32. Although Slacker Premium 
is not a noninteractive service, because it allows for a degree of user 
customization, Dr. Pelcovits claimed that most of the music transmitted 
through the service is ``pushed to the consumer,'' rather than being 
truly on-demand. Pelcovits WDT at 32. Therefore, he concluded that the 
data on plays-per-subscriber for this one service would serve as a good 
proxy for plays-per-subscriber for statutory subscription services.\43\ 
Pelcovits WDT at 32; 4/19/10 Tr. at 141-42 (Pelcovits). Although the 
unavailability of data for the number of plays of unambiguously 
noninteractive services reduces the usefulness of Dr. Pelcovits's 
proposed benchmark, it does not invalidate his methodology and 
results.\44\
---------------------------------------------------------------------------

    \43\ Dr. Pelcovits established his own definition of ``statutory 
services'' as ``services that offer no interactivity or limited 
interactivity,'' but he cautioned that he was not making a ``legal 
judgment'' as to whether his self-defined ``statutory services'' 
would qualify legally as noninteractive statutory services. 
Pelcovits WDT at 24-25 and n.22.
    \44\ Based on other data produced by Live365 during discovery, 
Dr. Pelcovits testified that he was able to confirm that the number 
of plays per subscriber that he calculated for Slacker Premium 
represented a reasonable estimate of the plays per subscriber for 
the statutory webcasting market. Pelcovits WDT at 32 n.27.
---------------------------------------------------------------------------

    Using the Slacker Premium data, Dr. Pelcovits determined that the 
average monthly plays per subscriber for a purely noninteractive 
service was 563.36. Pelcovits WDT at 32. Dividing the plays per 
subscriber for interactive services (287.37) by the plays per 
subscriber for statutory services (563.36) resulted in a per-play 
adjustment of 0.5101. Pelcovits WDT at 33.
(b) The Interactivity Adjustment
    Dr. Pelcovits also made an adjustment to account for the difference 
in the relative value of a service that is interactive to one that is 
not. Dr. Pelcovits began his calculation of the interactivity 
adjustment by comparing the subscription rates for selected benchmark 
interactive services with the subscription rates for certain audio 
streaming services that he identified as ``arguably'' noninteractive 
services. Pelcovits WDT at 24; Live365 Trial Ex. 5 at 31-32.
    Inasmuch as that ``value added'' feature (by definition) is not 
available for the noninteractive services, Dr.

[[Page 23117]]

Pelcovits calculated the value of the interactivity feature in order to 
subtract it from his proposed benchmark service. Dr. Pelcovits 
calculated the purported value added by interactivity in two ways. 4/
19/10 Tr. at 133-34 (Pelcovits); Live365 Trial Ex. 5 at 37-40.
    First, Dr. Pelcovits compared the retail subscription prices for 
the interactive and noninteractive streaming services that he analyzed. 
Pelcovits WDT at 24; Live365 Trial Ex. 5 at 39-40. More particularly, 
he supervised the collection of information regarding 41 audio 
streaming services out of the agreements that SoundExchange had 
provided to him. Pelcovits WDT at 24; 4/19/10 Tr. at 134-35 
(Pelcovits). However, Dr. Pelcovits excluded from his analysis 23 of 
those 41 services (56% of the total) because they were not subscription 
services. The remaining 18 services that he included in his analysis 
were paid subscription services. Pelcovits WDT at 24. Of these 18 
subscription services, 11 were in the benchmark interactive market, and 
7, according to Dr. Pelcovits, ``arguably qualify as statutory 
services.'' Pelcovits WDT at 24-25. Dr. Pelcovits found that the 
average monthly subscription price for the 7 noninteractive services 
that he defined as ``statutory'' was $4.13. Pelcovits WDT at 25.
    With regard to the 11 interactive subscription services, Dr. 
Pelcovits calculated the average subscription price in two different 
ways. Pelcovits WDT at 25.

     First, Dr. Pelcovits calculated the average monthly 
subscription prices for the 11 interactive services--an average of 
$13.70.
     Second, Dr. Pelcovits re-calculated the average monthly 
subscription prices of 2 of these 11 interactive services to adjust 
them downward to reflect additional value these 2 services provided 
in the form of a fixed monthly number of permanent downloads at no 
additional cost to the subscriber.\45\ This calculation resulted in 
a lower average monthly subscription price of $13.30.
---------------------------------------------------------------------------

    \45\ These ``permanent'' downloads are distinguished from the 
``conditional'' downloads referred to by Mr. McCrady and discussed 
supra, because the listener cannot retain the ``conditional'' 
downloads after his or her subscription has expired. McCrady WDT at 
12.

Pelcovits WDT at 25; 4/19/10 Tr. at 135-36 (Pelcovits).
    To make his interactivity adjustment, Dr. Pelcovits then subtracted 
the average (mean) subscription price of his 7 statutory noninteractive 
services ($4.13) from the average (mean) subscription price of his 11 
benchmark interactive services. Because he calculated two different 
averages for the 11 benchmark interactive services (one ignoring the 
bundled free downloads and the other adjusting for the bundled free 
downloads, as noted supra), Dr. Pelcovits performed two different 
subtractions ($13.70 - $4.13; and $13.30 - $4.13). These calculations 
resulted in interactivity adjustment factors of:

    0.301 (using the unadjusted subscription prices for the 
interactive services); and
    0.311 (using the subscription prices for the interactive 
services adjusted for the bundled downloads offered by two of the 
benchmark interactive services).

Pelcovits WDT at 26; 4/19/10 Tr. at 136-37 (Pelcovits).\46\
---------------------------------------------------------------------------

    \46\ ``Interactivity adjustment factor'' is simply the ratio of 
the mean noninteractive subscription price ($4.13) to the mean 
interactive subscription price, as calculated in two different ways 
($13.70 or $13.30). Thus, the math is as follows: $4.13/$13.70 = 
0.301 and $4.13/$13.30 = 0.311.
---------------------------------------------------------------------------

    As an alternative measure of the value of interactivity (to be 
subtracted from the benchmark value), Dr. Pelcovits performed a hedonic 
regression. Pelcovits WDT at 26; Live365 Trial Ex. 5 at 38-39. As Dr. 
Pelcovits accurately summarized, a hedonic regression is a statistical 
technique that can be applied ``to measure the value of different 
characteristics of a heterogeneous product.'' Pelcovits WDT at 26. See 
also Salinger WRT at 18 (``Hedonic regression is a statistical analysis 
of prices that seeks to explain prices as a function of product 
features.'').
    This hedonic regression was used ``to isolate the value of 
interactivity to consumers of on-line music services'' by measuring 
``the value of different characteristics of a heterogeneous product,'' 
which in this case is subscription audio streaming services. Pelcovits 
WDT at 26; 4/19/10 Tr. at 137 (Pelcovits). In his hedonic regression, 
Dr. Pelcovits analyzed a number of variables across the same 18 
subscription-streaming services he had considered in his ``mean 
comparison'' interactivity adjustment, and applied those variables to 
the subscription price. Pelcovits WDT at 26-27. Among the variables 
that Dr. Pelcovits included in his hedonic regression were: (i) The 
presence of interactivity; (ii) the availability of a mobile 
application for the service; and, (iii) and the ability to 
conditionally download tracks to a portable device (expressed as 
``Tethered Downloads'' in the regression table). Pelcovits WDT at 27; 
see also Live365 Trial Ex. 5 at 39.
    Dr. Pelcovits's hedonic regression analysis resulted in an 
interactivity coefficient indicating that ``interactivity is worth 
$8.52 per month to the typical subscriber.'' Pelcovits WDT at 28; 4/19/
10 Tr. at 137-39 (Pelcovits). Dr. Pelcovits then applied this $8.52 
value for interactivity to the $13.30 mean value for the 11 interactive 
on-demand services he had analyzed (see supra). By this comparison, the 
interactivity feature comprised 64.1% of the entire value of the price 
paid by consumers for subscriptions to interactive webcasting 
subscriptions ($8.52/$13.30 = 64.1%). Id. Alternatively stated, the 
value of a noninteractive subscription would create an alternative 
interactivity adjustment factor of 35.9% (i.e., 100% - 64.1%).
    Based on the above techniques, Dr. Pelcovits derived three 
potential interactivity adjustment factors. Pelcovits WDT at 28. That 
range is shown in the following table.

------------------------------------------------------------------------
                                                           Interactivity
                         Source                             adjustment
------------------------------------------------------------------------
Comparison of Mean Subscription Rates--Unadjusted                  0.301
 Subscription Prices....................................
Comparison of Mean Subscription Rates--Adjusted                    0.311
 Subscription Prices....................................
Regression of Subscription Prices.......................           0.359
------------------------------------------------------------------------

Pelcovits WDT at 29.
(iv) Dr. Pelcovits's Derivation of Recommended Rates Based on the 
Foregoing Adjusted Benchmark Analysis
    Dr. Pelcovits then multiplied the unadjusted per-play rate he had 
calculated in the benchmark market by the two adjustment factors. That 
is, he multiplied the unadjusted per-play rate by: (i) The per-play 
adjustment (that had accounted for the greater number of plays in the 
statutory noninteractive market) and (ii) the interactivity adjustment 
rate (calculated three different ways--two ``mean'' comparisons and one 
hedonic regression). Through this multiplication, Dr. Pelcovits derived 
the following range of recommended statutory per-play license fees:

[[Page 23118]]



------------------------------------------------------------------------
                                                               Proposed
                                                              statutory
       Recommended source of interactivity adjustment          per-play
                                                                 rate
                                                              (rounded)
------------------------------------------------------------------------
Comparison of Mean Subscription Rates--Unadjusted                $0.0034
 Subscription Prices ($0.02194 x 0.51 x 0.301) (benchmark
 per play rate) x ( of plays adj.) x
 (interactivity adj.)......................................
Comparison of Mean Subscription Rates--Adjusted                   0.0035
 Subscription Prices ($0.02194 x 0.51 x 0.311) (benchmark
 per play rate) x ( of plays adj.) x
 (interactivity adj.)......................................
Regression of Subscription Prices ($0.02194 x 0.51 x 0.359)       0.0040
 (benchmark per play rate) x ( of plays adj.) x
 (interactivity adj.)......................................
------------------------------------------------------------------------

Pelcovits WDT at 33; see 4/19/10 Tr. at 142-45 (Pelcovits) (explaining 
step-by-step calculations to derive recommended statutory per-play 
royalty fee).
    Dr. Pelcovits then calculated the simple average of the above three 
recommended rates--$0.0036 per play (rounded). Pelcovits WDT at 33; 4/
19/10 Tr. at 145 (Pelcovits).
(b) Review of Dr. Pelcovits's Interactive Benchmark Analysis
(i) The Overemphasis on Subscription Revenues and the Failure To 
Account for Advertising Revenues
    Dr. Pelcovits's interactive benchmark analysis is of some, albeit 
limited, assistance in determining the royalty rate in the 
noninteractive market. His analysis was based upon the subscription 
revenues of noninteractive webcasters, without accounting for their 
advertising revenues. In fact, ``the reality of a lot of the services 
is that they have a mix of subscribers and non-subscribers.'' 7/28/10 
Tr. at 55 (Salinger); see also 4/20/10 Tr. at 312-13 (Pelcovits) 
(acknowledging that most listening to noninteractive webcasting is by 
non-subscribers).
    Moreover, as noted supra, Dr. Pelcovits possessed data regarding 
advertising revenue for both the benchmark market and the statutory 
market, yet he chose not to focus on such data, asserting that it 
failed to reflect the willingness of consumers to pay for the 
services.\47\ Pelcovits WDT at 24.
---------------------------------------------------------------------------

    \47\ Dr. Pelcovits's decision to ignore advertising revenues in 
his analysis implicitly constituted an a priori rejection of the 
noninteractive webcaster business model that seeks revenue primarily 
through advertising rather than from subscriptions.
---------------------------------------------------------------------------

    The Judges conclude that the interactive benchmark model as 
developed by Dr. Pelcovits is compromised, and its usefulness reduced, 
by its failure to take into account the advertising revenue received in 
both the interactive benchmark market and the statutory noninteractive 
market.
(ii) SoundExchange's Failure To Incorporate Independent Label Contract 
Rates in its Benchmark Analysis
    Dr. Pelcovits relied upon the contracts between the major record 
companies and 18 webcasters in performing his interactive benchmark 
comparison. However, he completely excluded from his rate analysis the 
rates charged by the independent record companies in his benchmark 
interactive market and in the noninteractive market that is the subject 
of this proceeding. This is an important omission, because, as noted by 
Live365's rebuttal economic witness, Dr. Michael Salinger, 
approximately 40% of the music streamed on noninteractive webcasts is 
owned and licensed by independent labels. Salinger WRT at 15. On the 
other hand, Dr. Salinger did not provide any empirical support for the 
conclusion that inclusion of the rates charged by independent labels 
would have resulted in different rates. SX RFF at ]] 101-103.
    Thus, the issue becomes one of allocation of the burden of going 
forward with evidence on this point. The Judges conclude that since 
SoundExchange had collected information on 214 agreements between 
webcasters and record companies, including independents, it was in the 
best position to go forward with evidence indicating the impact, vel 
non, of the rates charged by the independent labels. By failing to do 
so, SoundExchange compromised the probative value of its benchmark 
analysis. Accordingly, the Judges conclude that the absence of any 
evidence as to the impact of the rates charged by the independent 
labels, either within the model itself or as an adjustment, diminishes 
the value of that interactive benchmark analysis.
(iii) SoundExchange's Failure To Adjust for the Downward Trend in Rates 
in the Interactive Benchmark Market
    The effective play rate in the interactive benchmark market 
calculated by Dr. Pelcovits covered an 18-month period from 2007 
through 2009. 4/20/10 Tr. at 309-10 (Pelcovits). Dr. Pelcovits relied 
upon the average rate in that 18-month period. However, he did not 
account for the fact that the rate had been declining during this 
period, from $0.02610 in 2007 down to $0.01917 in 2009. By relying upon 
the average during the period, $0.02194, and not weighting more heavily 
in that average the more recent periods, Dr. Pelcovits's model failed 
to account for the temporal decline of rates during his period of 
analysis. Salinger WRT at 16-17; Live365 Reb. Ex. 1; 7/28/10 Tr. at 
127-28 (Salinger).\48\ Thus, the Judges conclude that the interactive 
benchmark rate analysis is compromised by the failure to adequately 
weight this downward trend in rates.
---------------------------------------------------------------------------

    \48\ See note 24 supra, regarding the more serious problem with 
attempts to predict future industry trends.
---------------------------------------------------------------------------

    However, as Dr. Salinger acknowledged, this concern could have been 
addressed by multiplying Dr. Pelcovits's recommended $0.0036 rate by 
the ratio of the low 2009 rate to the average rate over the 18-month 
period, i.e., by multiplying that rate by .01917/.02194 (or .8737). 7/
28/10 Tr. at 128-29 (Salinger). SoundExchange performed this 
calculation and noted that the rate established by its interactive 
benchmark analysis decreased to $0.0031, still above its proposed rates 
for the term of the license. SX PFF ] 210.
(iv) The Limited Data Regarding Noninteractive Plays
    Dr. Pelcovits candidly admitted that he was unable to obtain data 
regarding the number of monthly noninteractive plays, because such data 
was not available. Pelcovits WDT at 31-32. Although he attempted to use 
a different source as a proxy for such data--the monthly plays by the 
Slacker Premium service that allegedly had some noninteractive 
features--the probative value of his analysis was diminished by this 
lack of sufficient data.

[[Page 23119]]

(c) Problems With Dr. Pelcovits's Hedonic Regression Used as an 
Alternative To Measure the Value of Interactivity To Be Subtracted From 
Interactive Benchmark Value
    Dr. Salinger set forth the same valid overarching criticism of Dr. 
Pelcovits's hedonic regression adjustment as he had asserted with 
regard to Dr. Pelcovits's adjustment based on the ratios of royalties 
to mean subscription rates in the two markets. That is, Dr. Salinger 
opined ``any estimate of a reasonable royalty rate . . . suffers from 
the fundamental flaw that noninteractive Internet radio is primarily an 
advertising-supported business, not a subscription business.'' Salinger 
WRT at 18 (emphasis added).
    On a more granular level, Dr. Salinger further questioned the 
results of Dr. Pelcovits's hedonic regression. First, Dr. Salinger 
disagreed with Dr. Pelcovits's use of ``dummy variables'' (i.e., 
``fixed effects variables'') in the hedonic regression. Second, Dr. 
Salinger questioned the significance of the results given what Dr. 
Salinger testified was the relatively broad confidence interval 
bracketing the estimated interactivity coefficient in the hedonic 
regression. Salinger WRT at 20, 21 n.31 and Exhibit 6; 7/28/10 Tr. at 
66-69 (Salinger).
    With regard to the first issue, Dr. Salinger noted, and Dr. 
Pelcovits did not disagree, that dummy variables ``are indicator 
variables that capture unobserved characteristics whose value does not 
change over time.'' Salinger WRT at 21; see also Pelcovits WDT at 28.
    In the present case, Dr. Pelcovits included fixed effects/dummy 
variables for six separate interactive services--one each offered by 
Classical Archives, Digitally Imported, Pasito Tunes, and Altnet 
(formerly Kazaa), respectively, and two offered by iMesh.com. In his 
Written Direct Testimony, Dr. Pelcovits did not comment upon the impact 
of these fixed effects/dummy variables. However, he also ran his 
regression without these fixed effects/dummy variables. This 
alternative regression increased the value of interactivity from $8.52 
to $10.55 per subscriber per month. Salinger WRT at 20.
    This higher value for the interactivity feature, when subtracted 
from the overall value of an interactive service as computed by Dr. 
Pelcovits, ``caus[ed] the estimated royalty rate to decline . . . from 
$0.0036 to $0.0023.'' Salinger WRT at 20 (emphasis added). 
SoundExchange did not contest the probative value of this criticism, 
but rather acknowledged: ``Dr. Pelcovits also ran regressions without 
the fixed effects variables, and those results were produced to 
Live365.'' SX PFF ] 215. The Judges are mindful that this essentially 
undisputed revised value--$0.0023--is highly proximate to the rates 
established in the WSA Agreements.\49\
---------------------------------------------------------------------------

    \49\ Dr. Pelcovits also acknowledged that his hedonic regression 
did not necessarily isolate product characteristics (such as 
interactivity in the present proceeding) from supply and demand 
effects on prices (subscription rates in the present proceeding). 4/
20/10 Tr. at 373-76.
---------------------------------------------------------------------------

    Dr. Salinger's second specific criticism of Dr. Pelcovits's hedonic 
regression, identified above, concerns the breadth of the confidence 
interval within which lies Dr. Pelcovits's estimated interactivity 
coefficient. Specifically, Dr. Pelcovits did not provide any 
``confidence interval'' around his result. Salinger WRT at 21-22 and 
n.31. Dr. Salinger calculated that, at a 95% confidence interval, Dr. 
Pelcovits's regression results would have a range that would be far 
less (on the low end of the range) than the rate that Live365 proposed 
and far higher (on the high end of the range) than the rates that 
SoundExchange proposed. Id.
3. The ``Affordability'' of the Proposed Interactive Benchmark Rates
    Live365 asserted that SoundExchange's interactive benchmark rate 
was too high. Specifically, Live365 asserted that this interactive 
benchmark rate could not be utilized because numerous webcasters would 
be unable to afford the $0.0036 rate derived from that analysis. 
Live365 PFF ]] 216-222. Although Live365 characterizes this alleged 
unaffordability as a ``reality check,'' it is no such thing. A single 
price established in any market by its very nature inevitably will 
restrict some purchasers who are unable or unwilling to pay the market 
price. (In common parlance, they may be said to have been ``priced out 
of the market.'') The rate of $0.0036 may be too high for other reasons 
(and indeed it is), but the fact that any particular number of 
webcasters might not profit under that rate, or that others would 
either shut down or never enter the market, is not evidence that the 
rate deviates from the market rate. The essence of a single market 
price is that it rations goods and services; by definition, a non-
discriminatory price system therefore excludes buyers who cannot or 
will not pay the market price (and excludes sellers who cannot or will 
not accept the market price).
4. Judges' Conclusions Regarding the Commercial Webcasters Rates
    To summarize the Judges' conclusions as discussed above: \50\

    \50\ In considering the Live365 proposal, the willing buyer/
willing seller standard in the Act encompasses consideration of 
economic, competitive, and programming information presented by the 
parties, including (i) the promotional or substitution effects of 
the use of webcasting services by the public on the sales of 
phonorecords or other effects of the use of webcasting that may 
interfere with or enhance the sound recording copyright owner's 
other streams of revenue from its sound recordings; and (ii) the 
relative contributions made by the copyright owner and the 
webcasting service with respect to creativity, technology, capital 
investment, cost and risk in bringing the copyrighted work and the 
service to the public. See 17 U.S.C. 114(f)(2)(B)(i) and (ii). The 
adoption of an adjusted benchmark approach to determine the rates 
leads this panel to agree with Web II and Web I that such statutory 
considerations implicitly have been factored into the negotiated 
prices utilized in the benchmark agreements. Web II, 72 FR at 24095; 
Web I, 67 FR at 45244. Therefore, the Judges have implicitly 
incorporated such considerations in the evaluation of the benchmark 
proposals submitted by SoundExchange. Accordingly, the Judges 
conclude that SoundExchange's separate analyses discussing these 
statutory factors, see SoundExchange PFF, Point IX, are subsumed in 
its willing buyer/willing seller analyses.
---------------------------------------------------------------------------

     The Judges will set a per-performance rate, in light of 
the fact that neither of the contesting parties proposed a 
percentage-of-revenue based rate or any other rate structure.
     The Judges shall not utilize the Live365 Model to 
establish either the rate for commercial webcasters or the zone of 
reasonableness within which an appropriate rate would lie.
     The Judges shall utilize the rates set forth in the WSA 
Agreements between SoundExchange and the NAB and Sirius XM, 
respectively, to establish an approximate zone of reasonableness for 
the statutory rates to be determined in this proceeding.
     The Judges shall utilize the SoundExchange interactive 
benchmark analysis, adjusted to reflect the undisputed impact of the 
fixed effects/dummy variables, to establish an approximate zone of 
reasonableness for the statutory rates to be determined in this 
proceeding.

    The Judges are also mindful of the procedural context of this 
determination, as summarized at the outset of this decision, supra. 
Rates were set for noninteractive commercial webcasting almost three 
years ago, on March 9, 2011, for the 2011-2015 rate period. No 
participant sought a rehearing or appealed those rates to the D.C. 
Circuit.
    Further, after the D.C. Circuit vacated the March 9, 2011, 
determination and the case was remanded to the Judges, neither Live365 
nor SoundExchange requested any new proceeding in connection with any 
aspect of the prior determination. Indeed, Live365 did not respond to 
the Judges' request for

[[Page 23120]]

suggestions as to how to proceed with the remand, and SoundExchange 
responded only with regard to the minimum fee issue that had been 
challenged on appeal by IBS, stating that the prior determination in 
that regard should be reaffirmed.
    Thus, it is clear that the contesting parties had accepted the 
rates as established in the March 9, 2011, determination. The Judges 
are reluctant to upset settled expectations by retroactively altering 
rates that have been established for several years, and that licensees 
have already paid in some years, provided that those rates fall within 
the zone of reasonableness that the Judges determine in this 
proceeding.
    The present de novo determination is substantively distinct in a 
number of respects from the prior determination, but the analysis leads 
to an approximate ``zone of reasonableness'' within which an 
appropriate rate for commercial webcasters can be established that 
includes the rates established in the March 9, 2011 determination.
    Specifically, the Judges find that the approximate zone of 
reasonableness for the rates for commercial webcasters for the 2011-
2015 rate period is as follows:

------------------------------------------------------------------------
            Year                   Lower bound           Upper bound
------------------------------------------------------------------------
2011........................  $0.0017 (NAB/SX       $0.0023 (lowest
                               rate).                adjusted
                                                     interactive rate).
2012........................  $0.0020 (NAB/SX;      $0.0023 (lowest
                               Sirius XM/SX rate).   adjusted
                                                     interactive rate).
2013........................  $0.0021 (Sirius XM/   $0.0023 (lowest
                               SX rate).             adjusted
                                                     interactive rate).
2014........................  $0.0022 (Sirius SM/   $0.0023 (lowest
                               SX rate).             adjusted
                                                     interactive; NAB/SX
                                                     rate).
2015........................  $0.0023 (lowest       $0.0025 (NAB/SX
                               adjusted              rate).
                               interactive rate).
------------------------------------------------------------------------

    The Judges recognize that the rates set previously for the 2011-
2015 term fall within this zone of reasonableness,\51\ and hereby adopt 
them.
---------------------------------------------------------------------------

    \51\ However, the zone of reasonableness in this determination 
is significantly tighter than the zone established in the vacated 
determination. Specifically, the zone in the vacated determination 
was bracketed by a low per-play rate of $0.0019 and a high rate of 
$0.0036. 76 FR at 13036.
---------------------------------------------------------------------------

    Accordingly, with regard to the license for commercial webcasters, 
the Judges set the following per-play rates for the five-year period 
that began in 2011:

------------------------------------------------------------------------
                            Year                                 Rate
------------------------------------------------------------------------
2011.......................................................      $0.0019
2012.......................................................      $0.0021
2013.......................................................      $0.0021
2014.......................................................      $0.0023
2015.......................................................      $0.0023
------------------------------------------------------------------------

V. Rates For Noncommercial Webcasters

A. Noncommercial Educational Webcasters

    On August 13, 2009, SoundExchange and CBI submitted a joint motion 
under 17 U.S.C. 801(b)(7)(A) regarding a partial settlement ``for 
certain internet transmissions by college radio stations and other 
noncommercial educational webcasters'' (CBI/SoundExchange Agreement). 
The parties sought to make the agreed rates and terms applicable to 
noncommercial educational webcasters for the period 2011 through 
2015.\52\ Joint Motion to Adopt Partial Settlement, at 1 (Aug. 13, 
2009). CBI and SoundExchange reached the CBI/SoundExchange Agreement 
under authorization granted by the 2009 WSA. The Copyright Office 
published the terms of the settlement in the Federal Register. See 74 
FR 40616 (Aug. 12, 2009). By virtue of that publication, the CBI/
SoundExchange Agreement is ``available, as an option, to any . . . 
noncommercial webcaster meeting the eligibility conditions of such 
agreement.'' 17 U.S.C. 114(f)(5)(B).
---------------------------------------------------------------------------

    \52\ The proposed regulatory language in the CBI/SoundExchange 
agreement originally included the following sentences in 37 CFR 
380.20(b) that created confusion as to whether SoundExchange and CBI 
were asking the Judges to adopt the agreement as an option for 
noncommercial educational webcasters or whether the agreement would 
be binding on all noncommercial educational webcasters:
    However, if a Noncommercial Educational Webcaster is also 
eligible for any other rates and terms for its Eligible 
Transmissions during the period January 1, 2011, through December 
31, 2015, it may by written notice to the Collective in a form to be 
provided by the Collective, elect to be subject to such other rates 
and terms rather than the rates and terms specified in this subpart. 
If a single educational institution has more than one station making 
Eligible Transmissions, each such station may determine individually 
whether it elects to be subject to this subpart.
    Digital Performance Right in Sound Recordings and Ephemeral 
Recordings, Proposed rule, 75 FR 16377, 16383 (Apr. 1, 2010); see 5/
5/10 Tr. at 5-51 (Hearing on Joint Motion to Adopt Partial 
Settlement).
    With the concurrence of SoundExchange's counsel, see 5/5/10 Tr. 
at 46-47, 50-51 (Hearing on Joint Motion to Adopt Partial 
Settlement), the Judges find the language confusing and unnecessary 
and decline to adopt it.
---------------------------------------------------------------------------

    On April 1, 2010, the Judges published the CBI/SoundExchange 
Agreement, with minor changes,\53\ under the authority of section 
801(b)(7)(A) of the Act. See 75 FR 16377 (Apr. 1, 2010) (including CBI/
SoundExchange Agreement and NAB/SoundExchange Agreement). With respect 
to rates, the Agreement imposes an annual, nonrefundable minimum fee of 
$500 for each station or individual channel, including each of its 
individual side channels. Id. at 16384. Under the Agreement, those 
noncommercial educational webcasters whose monthly ATH exceed 159,140, 
pay additional fees on a per-performance basis. The CBI/SoundExchange 
Agreement also provides for an optional $100 proxy fee that 
noncommercial educational webcasters may pay in lieu of submitting 
reports of use of sound recordings. The agreement also contains a 
number of payment terms.
---------------------------------------------------------------------------

    \53\ The Judges modified a reference to earlier regulations to 
bring it up to date. Deeming it inappropriate to the purpose of CRB 
regulations, the Judges declined to adopt language regarding 
compliance or noncompliance with the Agreement and reservation of 
rights. See note 52 supra, and accompanying text.
---------------------------------------------------------------------------

    Section 801(b)(7)(A) of the Act provides that, after providing 
notice and opportunity for affected parties to comment, the Judges 
shall adopt a settlement agreement among some or all of the 
participants in a proceeding as a basis for statutory rates and terms, 
unless a participant in the proceeding objects and the Judges find that 
the agreement does not provide a reasonable basis for setting rates and 
terms. The Judges received 24 comments from terrestrial radio stations 
favoring adoption of the CBI/SoundExchange Agreement.\54\ IBS opposed 
adoption of the CBI/SoundExchange Agreement. The Judges held a hearing 
on those objections on May 5, 2010.\55\
---------------------------------------------------------------------------

    \54\ Many of these comments asserted that the rate structure was 
compatible with their stations' respective budget constraints, see, 
e.g., Comment of Bill Keith for WSDP Radio, Plymouth-Canton 
Community Schools (Apr. 20, 2010) (``The monetary amount was 
reasonable and most college or high school stations can live with 
the amounts charged for webcasting''), and several expressed 
satisfaction with the $100 proxy fee in lieu of reports of use. See, 
e.g., Comments of Christopher Thuringer for WRFL, University of 
Kentucky (Apr. 20, 2010); Comments of David Black, General Manager, 
WSUM-FM (Apr. 19, 2010).
    \55\ The Judges deferred a decision whether to adopt the 
settlement until IBS had an opportunity to present its witness 
testimony as part of its direct and rebuttal cases.

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

[[Page 23121]]

    The rationale for the IBS objection to adoption of the settlement 
described in the CBI/SoundExchange Agreement has remained elusive 
throughout the proceeding. In its initial comments, IBS expressed its 
concern that adoption of the agreement would create an ``impression'' 
that the Judges had ``prejudged the outcome of the adjudicatory 
hearing,'' notwithstanding IBS's acknowledgement that ``the proposed 
rates and terms . . . are non-exclusive, i.e., [the Agreement] provides 
for other parties' agreeing with SX to different rates and terms.'' 
Comments of IBS (Apr. 22, 2010).
    During the May 5, 2010, hearing, IBS argued that by moving for 
adoption of their settlement agreement, CBI and SoundExchange were 
``attempt[ing] to freeze IBS out of statutory rights to a decision from 
the Board on the record.'' 5/5/10 Tr. at 52 (Hearing on Joint Motion to 
Adopt Partial Settlement). IBS also raised for the first time specific 
exceptions to the $500 minimum fee and $100 proxy fee that are part of 
the CBI/SoundExchange Agreement. Id. at 62-64.
    In closing argument, IBS reiterated its objection to adoption of 
the CBI/SoundExchange Agreement. When pressed by the Judges to 
articulate specific objections, IBS counsel stated that IBS objected to 
the agreement to the extent it applied to IBS's smaller members.\56\ By 
this, the Judges understand counsel to be expressing concern that 
adoption of the agreement would prevent IBS from pursuing its rate 
proposal (for ``small'' and ``very small'' noncommercial webcasters) in 
the proceeding.
---------------------------------------------------------------------------

    \56\ [THE JUDGES]: You're not proposing a rate for noncommercial 
educational webcasters. Only CBI and SoundExchange are.
    MR. MALONE: Right.
    [THE JUDGES]: So why are you objecting to the adoption of that 
if you have a--two separate categories that you want adopted?
    MR. MALONE: Well, the judges can certainly say that--I mean, 
there's nothing incompatible with them. The--
    [THE JUDGES]: But I'm asking you why are you still objecting to 
the adoption of a $500 minimum fee for noncommercial educational 
webcasters when you have proposed new fees for two new types of 
services and have not proposed a fee for something called a 
noncommercial educational webcaster?
    MR. MALONE: Well, our--
    [THE JUDGES]: Where is your dog in that fight? I don't see it.
    MR. MALONE: All right. The dog in that fight is--and, again, 
excluding indirect effects that I understand to be the context of 
your question. We have no objection to the terms that are there as 
long as they don't apply to our small stations.
    [THE JUDGES]: So you're just objecting to it on the theory that 
you just hope that what's ever in there doesn't somehow get applied 
to your case, even though you're asking for two completely different 
services?
    MR. MALONE: That's essentially correct, Your Honor.
    9/30/10 Tr. at 660-61 (IBS Closing Argument).
---------------------------------------------------------------------------

    The Judges find that IBS did not interpose a proper objection under 
section 801(b)(7)(A)(ii) of the Act that would require the Judges to 
weigh the reasonableness of the CBI/SoundExchange Agreement. IBS's 
objection is premised on the erroneous assumption that adoption of the 
agreement would prevent IBS from pursuing its rate proposal. IBS's 
proposal relates to different categories of webcasters from those 
covered by the CBI/SoundExchange Agreement. While the latter covers 
noncommercial educational webcasters, the IBS proposal covers 
noncommercial webcasters (whether or not they qualify as 
``educational'') that fall within its definitions of ``small'' and 
``very small.'' Adoption of the one does not preclude (and has not 
precluded) consideration of the other.
    In addition, even if the Judges were to consider IBS's objection to 
be proper, IBS failed to present any evidence to support a conclusion 
that the CBI/SoundExchange Agreement does not form a reasonable basis 
for setting rates and terms for noncommercial educational webcasters. 
IBS's counsel made dire predictions that the rate structure adopted in 
the agreement would prevent many IBS members from performing webcasting 
services. See, e.g., 5/5/10 Tr. at 62-64 (Hearing on Joint Motion to 
Adopt Partial Settlement). IBS did not offer testimony from any 
adversely affected member, however, in spite of the Judges' invitation 
to do so. Id. at 81-82. By contrast, 24 noncommercial webcasters filed 
comments with the Judges stating that they support the rates and terms 
of the CBI/SoundExchange Agreement, which they found reasonable and 
affordable. The Judges find those comments to be both credible and 
persuasive.
    Finding neither a proper nor a credible objection to the CBI/
SoundExchange Agreement, nor other grounds requiring rejection, the 
Judges adopt the agreement (with the modification described supra at 
note 52) as the basis for rates and terms for noncommercial educational 
webcasters for the period 2011-2015.

B. Other Noncommercial Webcasters

1. Rate Proposals of the Participants
    For noncommercial webcasters, SoundExchange proposes a royalty of 
$500 per station or channel (including any side channel maintained by a 
broadcaster that is a licensee, if not covered by SoundExchange's 
proposed settlement with CBI) for each calendar year or part of a 
calendar year during which the webcaster is a licensee under sections 
114 and 112 of the Act. The licensee would pay the royalty in the form 
of a $500 per station or channel annual minimum fee, with no cap. The 
$500 fee would constitute the minimum fee under both 17 U.S.C. 
112(e)(4) and 114(f)(2)(B), and would permit the noncommercial 
webcaster to perform sound recordings up to a limit of 159,140 ATH per 
month. If a station or channel were to exceed the ATH limit in any 
month, then the noncommercial webcaster would pay at the commercial 
usage rates for any overage. Second Revised Proposed Rates and Terms of 
SoundExchange, at 3-4 (July 23, 2010). SoundExchange's proposal would 
cover all noncommercial webcasters that are not covered by the CBI/
SoundExchange Agreement (i.e., noncommercial educational webcasters).
    The IBS rate proposal is more difficult to discern. See, e.g., 4/
22/10 Tr. at 774-93 (Kass). \57\ IBS proposes to create two new 
categories of noncommercial webcasters: Small noncommercial webcasters 
(defined as noncommercial webcasters with usage up to 15,914 ATH per 
month) and very small noncommercial webcasters (defined as 
noncommercial webcasters with usage up to 6,365 ATH per month). 
Amplification of IBS's Restated Rate Proposal, at 1 (July 28, 2010). 
Under the IBS proposal, small noncommercial webcasters would pay a flat 
annual fee of $50, which would also constitute the minimum fee. Very 
small noncommercial webcasters would pay a flat annual fee of $20, 
which would constitute the minimum fee. Id. at 2. Noncommercial 
webcasters that exceed

[[Page 23122]]

15,914 ATH would be subject to the noncommercial webcasting rates 
proposed by SoundExchange, including SoundExchange's proposed per 
performance rates for transmissions in excess of 159,140 ATH per month. 
Id. IBS also expressly adopted SoundExchange's proposal with regard to 
ephemeral recordings under section 112. Id.
---------------------------------------------------------------------------

    \57\ IBS did not file a formal rate proposal with the Judges 
prior to the evidentiary hearing. Instead, IBS included a vague 
request in the written direct testimony of one of its three 
witnesses, Frederick J. Kass, Jr., IBS's chief operating officer. 
Kass WDT at 1, 9 (``IBS Members should only pay for their direct use 
of the statutory license by the IBS Member. There should be no 
minimum fee greater than that which would reasonably approximate the 
annual direct use of the statutory license, not to exceed $25.00 
annually.''). Capt. Kass's written testimony also included as an 
exhibit a joint petition to adopt an agreement negotiated between 
the RIAA, IBS, and the Harvard Radio Broadcasting, Co. that was 
submitted to the Copyright Office on August 26, 2004. That agreement 
contained rates that diverged from those Capt. Kass proposed in his 
testimony. This discrepancy led to a convoluted discussion during 
Capt. Kass's live testimony as the Judges strived to determine 
precisely what rate structure IBS was seeking. 4/22/10 Tr. at 774-93 
(Kass). After the hearing, IBS submitted a ``Restatement of IBS's 
Rate Proposal'' on May 21, 2010, and an ``Amplification of IBS's 
Restated Rate Proposal'' on July 28, 2010. The proposal summarized 
in text is from IBS's July 28, 2010, submission.
---------------------------------------------------------------------------

    IBS also proposed that noncommercial webcasters transmitting more 
than 15,914 ATH but no more than 55,000 ATH per month, be permitted to 
pay a $100 annual proxy fee in lieu of submitting reports of use. Id. 
at 3. IBS proposed that noncommercial webcasters transmitting fewer 
than 15,914 ATH per month be exempted from making reports of use. Id. 
While couched as part of IBS's rate proposal, this is a proposed term 
that the Judges will consider in the discussion of terms, infra, part 
VI.
    As an alternative to the foregoing proposal, IBS stated that it was 
``prepared to offer to SoundExchange'' an annual $10,000 payment to 
cover IBS members that are small noncommercial webcasters. Id. The 
$10,000 payment was apparently an estimate based on IBS's proposed 
rates for ``small'' and ``very small'' noncommercial webcasters; to the 
extent that participation by IBS members were to exceed $10,000, 
``there would be a true up within 15 days of the end of the year.'' 
Id.\58\
---------------------------------------------------------------------------

    \58\ It is unclear whether IBS intended this proposed payment as 
part of the rates proposed to the Judges for adoption, or as an 
offer to SoundExchange. Given the Judges' rejection of IBS's 
proposed rate structure, it is not necessary to resolve this 
ambiguity.
---------------------------------------------------------------------------

2. Evaluation of the Rate Proposals and Determination of Rates
    Section 114(f)(2)(B) of the Act directs the Judges to ``distinguish 
among the different types of . . . services then in operation'' in 
applying the willing buyer/willing seller standard to determine rates 
and terms. Id. The recognition of different services is 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.'' Id.
    In Web II, the Judges found that noncommercial webcasters 
constituted a different type of service that should be subject to a 
different rate from commercial webcasters.

    Based on the available evidence, we find that, up to a point, 
certain ``noncommercial'' webcasters may constitute a distinct 
segment of the noninteractive webcasting market that in a willing 
buyer/willing seller hypothetical marketplace would produce 
different, lower rates than . . . for Commercial Webcasters. A 
segmented marketplace may have multiple equilibrium prices because 
it has multiple demand curves for the same commodity relative to a 
single supply curve . . . . The multiple demand curves represent 
distinct classes of buyers and each demand curve exhibits a 
different price elasticity of demand. By definition, if the 
commodity in question derives its demand from its ultimate use, then 
the marketplace can remain segmented only if buyers are unable to 
transfer the commodity easily among ultimate uses. Put another way, 
each type of ultimate use must be different.

Web II, 72 FR at 24097. As a safeguard to ensure that the distinct 
segment of the market occupied by noncommercial webcasters did not 
encroach on the segment occupied by commercial webcasters, the Judges 
capped eligibility for the noncommercial rate at 159,140 ATH per month. 
Id. at 24097, 24099-100.
    In this proceeding both SoundExchange and IBS have proposed rates 
for noncommercial webcasters that differ from the rates for commercial 
webcasters, implicitly endorsing the commercial/noncommercial 
distinction adopted by the Judges in Web II. For noncommercial 
webcasters that do not exceed the 159,140 ATH monthly thresholds, these 
participants have proposed the continuation of what is economically a 
zero rate for the sound recordings (together with a $500 minimum fee).
    The Judges conclude that it is appropriate to continue this 
commercial/noncommercial distinction because there is a good economic 
foundation for maintaining this dichotomy. More specifically, a 
``noncommercial'' webcaster by definition is not participating fully in 
the private market. Although the costs associated with the production 
and delivery of a sound recording remain the same regardless of whether 
it is played by a commercial or noncommercial webcaster, apparently the 
noncommercial webcaster receives little or no customer or advertiser 
revenue. (Revenue must be received from some source though, in order to 
pay the minimum fee.)
    The zero per-performance fee has an economic basis because it 
reflects: (i) The paucity of revenue earned by a noncommercial 
webcaster; and (ii) the essentially zero marginal cost to the licensors 
of supplying an additional copy of a sound recording. The $500 annual 
minimum fee per channel or station defrays a portion of the transaction 
costs incurred in administering the license.\59\
---------------------------------------------------------------------------

    \59\ Of course, this rate structure does not permit the 
licensors to recoup from the noncommercial webcasters any portion of 
the long-term (non-marginal) costs incurred in the creation and 
production of sound recordings.
---------------------------------------------------------------------------

    Where SoundExchange and IBS part company is with IBS's proposal to 
make further distinctions among noncommercial webcasters based on the 
quantity of sound recordings they transmit under the statutory license 
(as measured by ATH).
    Section 114(f)(2)(B) expressly mentions the quantity of use of 
sound recordings as an element that may be considered in recognizing 
different types of services. If a participant in a rate proceeding were 
to present evidence that, in a hypothetical marketplace, a willing 
buyer and a willing seller would negotiate a different rate for 
noncommercial webcasters at a given ATH level than they would for all 
other noncommercial webcasters, that would argue in favor of 
recognizing noncommercial webcasters at that ATH level as a distinct 
type of service. IBS, however, did not present any such evidence.
    IBS presented testimony from three witnesses as part of its direct 
case.\60\ Mr. John Murphy, general manager of WHUS at the University of 
Connecticut, Mr. Benjamin Shaiken, a student at the University of 
Connecticut and operations manager of WHUS, and Captain Kass, each 
testified about the distinctions between college (and, to a lesser 
extent, high school) radio stations and commercial radio stations. 4/
21/10 Tr. at 570-73 (Murphy); Murphy WDT ] 4; 4/21/10 Tr. at 615 
(Shaiken); Shaiken WDT ] 6; 4/22/10 Tr. at 761, 765 (Kass); Kass WDT ] 
6. This is beside the point. There is no dispute between SoundExchange 
and IBS as to whether there should be different rates for commercial 
and noncommercial webcasters. Both participants accept the commercial/
noncommercial distinction that was part of the Judges' determination in 
Web II, and the Judges adopt it in this proceeding. The issue at hand 
is whether there should be a

[[Page 23123]]

distinction among different groups within the category of noncommercial 
webcasters.
---------------------------------------------------------------------------

    \60\ The Judges declined to admit the testimony of IBS's sole 
rebuttal witness, Frederick Kass, after it became apparent that his 
Written Rebuttal Testimony was not submitted in accordance with the 
Judges' rules (it was not verified in accordance with 37 CFR 
350.4(d)) and Capt. Kass was unfamiliar with its contents. 7/29/10 
Tr. at 292-96 (Kass). IBS sought reconsideration of the decision, 
which the Judges denied. Order Denying IBS's Motion for 
Reconsideration of the Rulings Excluding Its Rebuttal Case (Aug. 18, 
2010). Even if Capt. Kass's testimony had been admitted, it could 
not have made up for the deficiencies of IBS's direct case, as such 
testimony would have been outside the scope of rebuttal testimony.
---------------------------------------------------------------------------

    IBS's primary contention to support a different rate for ``small'' 
and ``very small'' noncommercial webcasters was that entities falling 
into those categories are unable to pay the $500 minimum fee proposed 
by SoundExchange. This argument fails for several reasons.
    First and foremost, there is no record evidence to support the 
contention that noncommercial webcasters who transmit less than 15,914 
ATH per month are unable to pay a $500 minimum royalty. IBS did not 
offer testimony from any entity that demonstrably qualified as a 
``small'' or ``very small'' noncommercial webcaster.\61\ Conclusory 
statements by counsel that a $500 minimum royalty is unaffordable for 
smaller noncommercial webcasters are not evidence. See, e.g., 5/5/10 
Tr. at 62-64 (Hearing on Joint Motion to Adopt Partial Settlement); IBS 
PFF at ]] 9-10; IBS PCL at ] 4. Further, these assertions are undercut 
by testimony that some of these same entities pay IBS close to $500 
annually for membership dues and fees for attending conferences. See 4/
22/10 Tr. at 803-05 (Kass). The only testimony that mentions any 
specifics about the finances of smaller webcasters is a reference by 
Captain Kass to a survey that showed that IBS members had an average 
annual operating budget of $9,000. Kass WDT at ] 9. The survey, which 
was conducted more than ten years ago, 4/22/10 Tr. at 835 (Kass), was 
not offered into evidence. Without documentary evidence that would 
allow the Judges to assess the validity of the survey, Capt. Kass's 
reference to it cannot be accepted as evidence. See 37 CFR 351.10(e). 
Even if the Judges could accept such a reference as evidence, it would 
not advance IBS's case. On its face, an assertion that the average 
operating budget for IBS members is $9,000 does not establish that its 
members lack the wherewithal to pay a $500 minimum royalty.
---------------------------------------------------------------------------

    \61\ The two IBS witnesses who were actually engaged in 
webcasting were both affiliated with WHUS at the University of 
Connecticut, Storrs. There is no record evidence regarding the 
quantity of sound recordings transmitted by WHUS. Two facts in the 
record--WHUS's 2009 annual revenues of more than $500,000, and their 
annual profits of more than $87,000, 4/21/10 Tr. at 583-86 
(Murphy)--suggest that WHUS is not a ``small'' or ``very small'' 
webcaster as those terms are conventionally understood. See also id. 
at 590 (``WHUS is probably one of the most financially well-off 
stations in the entire IBS system'').
---------------------------------------------------------------------------

    There also is no evidence in the record to establish any 
correlation between the quantity of sound recordings being transmitted 
by a noncommercial webcaster and the size of that webcaster's operating 
budget (and, thus, its ability to pay a $500 annual minimum fee).
    In addition, the evidence strongly suggests that the ATH cutoffs 
that IBS proposed for ``small'' and ``very small'' noncommercial 
webcasters are arbitrary. It appears that IBS chose ATH levels that 
represent 10% and 4%, respectively, of the ATH cutoff for noncommercial 
webcasters employed in Web II and SoundExchange's rate proposal. Id. at 
787, 791; IBS PFF at ] 10; IBS PCL at ] 1. Nothing in the record 
substantiates these ATH levels as definitive or conclusive of a 
webcaster's ability to pay a $500 minimum royalty.
    Finally, even if there were a sufficient basis in the record to 
conclude that ``small'' and ``very small'' noncommercial webcasters are 
unable to pay a $500 minimum fee, that, in itself, does not demonstrate 
that a willing seller in a hypothetical marketplace would be prepared 
to negotiate a different, lower rate with them. That proposition is 
particularly dubious in this proceeding given the evidence in the 
record (discussed infra) that SoundExchange's average annual 
administrative cost exceeds $500 per station or side channel. The 
record does not support a conclusion that, in a hypothetical 
marketplace, a willing seller would agree to a price that is 
substantially below its administrative costs.
    As to the statutory criterion of the ``nature of the use of sound 
recordings'' for distinguishing between types of services, there is no 
evidence in the record establishing that the use of sound recordings by 
``small'' and ``very small'' noncommercial webcasters differs 
qualitatively from that of other noncommercial webcasters. 9/30/10 Tr. 
at 647-51 (IBS Closing Argument) (conceding the point).
    For the foregoing reasons, the Judges find that IBS has failed to 
establish a basis for its proposal to recognize ``small'' and ``very 
small'' noncommercial webcasters as types of services that are distinct 
from noncommercial webcasters generally. The remainder of the IBS rate 
proposal (for noncommercial webcasters that exceed 15,914 ATH per 
month) is identical to the SoundExchange rate proposal. As noted supra, 
IBS proposed an additional term for a subset of noncommercial 
webcasters. This is discussed infra, part VI. The Judges, therefore, 
reject the IBS proposal for ``small'' and ``very small'' noncommercial 
webcasters and proceed to evaluate the SoundExchange rate proposal for 
noncommercial webcasters.
    SoundExchange contends that its rate proposal (i) most closely 
approximates the rate that a willing buyer and willing seller would 
negotiate in a hypothetical market, (ii) is demonstrably affordable to 
a broad range of noncommercial webcasters, and (iii) is objectively 
reasonable given the average administrative cost per service or 
channel. The Judges agree.
    The CBI/SoundExchange Agreement (see III.B.2.A, supra) is 
persuasive evidence that SoundExchange's proposal satisfies the willing 
buyer/willing seller standard. That negotiated agreement employs the 
same minimum per-channel fee without a cap, as well as the 159,140 ATH 
limitation. The fact that 24 noncommercial webcasters filed comments 
supporting the agreement corroborates that conclusion.
    SoundExchange points out that it was established in Web II that 363 
noncommercial webcasters paid royalties in 2009 similar to 
SoundExchange's current rate proposal, with 305 of those webcasters 
paying only the $500 minimum fee. Web II (Determination on Remand), 75 
FR at 56874. Taken together with IBS's failure to present even a morsel 
of contrary evidence, the Judges find this fact to be strong evidence 
that noncommercial webcasters are able and willing to pay the proposed 
fees.\62\
---------------------------------------------------------------------------

    \62\ In its proposed findings, IBS introduced two new related 
arguments: (i) ``Congress in Section 114(f)(2) intended that the 
minimum rate be tailored to the type of service in accord with the 
general public policy favoring small businesses,'' and (ii) the 
Judges are required under the Regulatory Flexibility Act (RFA), 5 
U.S.C. 601(6), to determine whether the $500 fee unnecessarily 
burdens IBS's members. IBS PFF (Reformatted) at ]] 10-13. Both 
contentions are without merit.
    The Judges find no support in the text or legislative history of 
the Act for the proposition that rates adopted under section 
114(f)(2) must be tailored to benefit small businesses. The statute 
is quite clear that the Judges' task is to determine rates that 
``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).
    IBS has also failed to establish that the RFA applies to this 
proceeding. The RFA defines a ``rule'' (that triggers review under 
the Act) as ``any rule for which the agency publishes a general 
notice of proposed rulemaking pursuant to'' the APA. 5 U.S.C. 
601(2). Determinations of the Judges in rate proceedings are not 
subject to the notice and comment rulemaking process under the APA. 
Moreover, the RFA's definition of ``rule'' specifically excludes ``a 
rule of particular applicability relating to rates.'' Id.
    Nor has IBS established that any of its members (or any entities 
falling within its proposed definitions of ``small'' and ``very 
small'' noncommercial webcasters) are ``small entities'' as defined 
in 5 U.S.C. 601(6). IBS did not introduce any evidence concerning 
any webcaster other than WHUS, and never even identified its own 
members in this proceeding.
    In any event, the Judges did consider the circumstances of 
noncommercial webcasters in establishing the $500 fee, and found 
that the evidence supported their willingness and ability to pay it.

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[[Page 23124]]

    Finally, the testimony of Ms. Barrie Kessler, SoundExchange's Chief 
Operating Officer, demonstrates that the $500 annual minimum fee is 
reasonable. Ms. Kessler estimated SoundExchange's annual administrative 
cost per station or channel to be approximately $825 on average. 
Kessler WDT at 25. IBS offered no persuasive evidence to dispute this 
estimate. As the Judges have noted in previous proceedings, it is 
reasonable and appropriate for the minimum fee to at least cover 
SoundExchange's administrative cost. See, e.g., Web II (Determination 
on Remand), 75 FR at 56873-74. With the average administrative cost 
exceeding $800, the Judges find a $500 minimum fee to be eminently 
reasonable and appropriate.
    In conclusion, the Judges find that the evidence in this proceeding 
strongly supports SoundExchange's rate proposal for noncommercial 
webcasters. The Judges adopt that proposal for the 2011-2015 rate 
period.

VI. Terms

    As part of every rate determination, the Judges adjust the 
regulatory language that effects the rate changes. These implementing 
terms are published in title 37 of the Code of Federal Regulations. The 
Judges are obliged to adopt agreed terms if, after published notice, no 
party prospectively bound by the terms objects. See 17 U.S.C. 
801(b)(7)(A). For the Judges to adopt a contested proposed term, the 
proponent must show support for its adoption by reference to the record 
of the proceeding.
    In this proceeding, both SoundExchange and Live365 proposed changes 
to the existing regulatory language. Some of the terms proposed by 
SoundExchange are contained in the NAB/SoundExchange and CBI/
SoundExchange agreements adopted in this proceeding. The Judges will 
adopt any contested proposed terms only if the proponent meets its 
evidentiary burden.

A. Uncontested Terms

1. Collective
    The Judges have concluded previously that designation of a single 
Collective is economically and administratively efficient. No party to 
this proceeding requested a different or additional Collective. 
SoundExchange seeks to continue as the sole Collective for royalties 
paid by commercial and noncommercial webcasters under the licenses at 
issue in this proceeding for the period 2011-2015.
    SoundExchange is a section 501(c)(6) nonprofit organization 
governed by a Board of Directors comprised of an equal number of artist 
representatives and copyright owners. See Kessler WDT at 2. Over the 
years of its service as the Collective, SoundExchange has gained 
knowledge and experience and has developed efficient systems for 
achieving the goals of the Collective at a reasonable cost to those 
entitled to the royalties. See id. at 4. In the absence of any request 
or suggestion to the contrary, the Judges designate SoundExchange as 
the Collective for the 2011-2015 license period.
2. Stipulated Terms and Technical and Conforming Changes
    SoundExchange and Live365 stipulated to certain terms in the 
Proposed Regulations appearing as an attachment to the Second Revised 
Proposed Rates and Terms of SoundExchange, Inc., filed July 23, 2010. 
They stipulated that some of the current provisions of the webcasting 
terms remain unchanged, that some provisions be removed or changed 
because the terms were applicable only to the 2006-2010 license period, 
and that some provisions be changed to reflect the terms of the NAB/
SoundExchange and CBI/SoundExchange agreements.
    The Judges find that the stipulated terms constitute for the most 
part technical and non-controversial changes that will add to the 
clarity of the applicable regulations. The Judges, therefore, adopt the 
terms proposed jointly by SoundExchange and Live365. In addition, the 
Judges adopt what they deem to be technical and conforming changes to 
the regulations proposed by SoundExchange, and not opposed by any 
party, in Section IV of their Second Revised Rates and Terms, filed 
July 23, 2010.
3. Electronic Signature on Statement of Account
    SoundExchange proposed eliminating the requirement of a handwritten 
signature on the statement of account found in section 380.4(f)(3). SX 
PFF at ] 576. According to SoundExchange, allowing electronic 
signatures would make it easier for licensees to submit their 
statements of account. Id., citing Funn WRT at 3 n.1. Live365's 
proposed regulations would also eliminate the requirement for a 
handwritten signature on the statement of account. See Attachment to 
PFF, Proposed Regulations, Sec.  380.4(f)(3).
    The Judges find that this uncontested term would improve the ease 
and efficiency with which statements of account may be processed 
electronically. In addition, they find the change to be consonant with 
the public policy preference expressed by Congress in adopting the E-
SIGN Act, Public Law 106-229, 114 Stat. 464 (June 30, 2000), which 
established a general rule upholding the validity of electronic 
signatures in interstate and foreign commerce.
    The Judges note that the terms they adopted with regard to other 
categories of licensees did not eliminate the extant requirement for a 
handwritten signature on statements of account. See, e.g., 37 CFR 
380.13(f)(3) (for Broadcasters); 380.23(f)(4) (for Noncommercial 
Educational Webcasters). The signatories to the Agreements 
incorporating the handwritten signature requirement did not participate 
in the hearing, however, and did not request a change in the signature 
requirement in this proceeding. Given the advance of technology, the 
Judges anticipate such requests in the forthcoming rulemaking 
proceeding. See note 66, infra.
    The adopted terms are included in the appended regulatory language.

B. Contested Terms for Commercial Webcasters

1. Terms Proposed by Live365
    Live365 proposed changes to the definitions of two terms in section 
380.2: ``performance'' and ``aggregate tuning hours.'' \63\ Live365 PFF 
at ] 387 and PCL at ] 79. Specifically, Live365 proposed to modify the 
definition of ``performance'' to ``exclude[ ] any performances of sound 
recording that are not more than thirty (30) consecutive seconds.'' 
Live365 PFF at ] 387. Live365 suggested this modification would conform 
the definition of ``performance'' in section 380.2 to that of a 
``performance'' or ``play'' defined in the four interactive service 
agreements reviewed by Dr. Pelcovits. Id. Live365 also contended that 
precedent has excluded partial performances from ``royalty-bearing'' 
performances, citing Digital Performance Right in Sound Recordings and 
Ephemeral Recordings, Docket Nos.

[[Page 23125]]

2002-1 CARP DTRA3 & 2001-2 CARP DTNSRA, 68 FR 27506, 09 (May 20, 2003).
---------------------------------------------------------------------------

    \63\ In the proposed regulations attached to its proposed 
findings of fact, Live365 included an additional term: A proposed 
deadline for the completion and issuance of a report regarding an 
audit to verify royalty payments. See Attachment to Live365's 
Proposed Findings of Fact and Conclusions of Law, Sec.  380.6(g). 
Live365 did not discuss this proposal in its proposed findings and 
conclusions, and Live365 presented no evidence to support the need 
for such a term. The Judges consider the proposal withdrawn.
---------------------------------------------------------------------------

    Live365's proposal regarding the definition of ``aggregate tuning 
hours'' sought to exclude programming that does not contain recorded 
music, e.g., talk, sports, and advertising not containing music. 
Live365 PCL at ] 79. Live365 asserted ``programming without sound 
recordings should not be subject to consideration in regulations 
dealing with a royalty to be paid for the use of sound recordings.'' 
Id.
    SoundExchange opposed both of the Live365 proposed modifications. 
SoundExchange contended that these proposed modifications would 
constitute new terms, not revisions to a rate proposal, which 
SoundExchange asserted may be revised, under section 351.4(b)(3), at 
any time up to and including submission of proposed findings of 
fact.\64\ SX Reply Findings of Fact at ] 223 (hereinafter, RFF).
---------------------------------------------------------------------------

    \64\ The Judges need not address this argument as they decline 
to adopt the proposal on other grounds.
---------------------------------------------------------------------------

    SoundExchange asserted that Live365's citation to interactive 
service agreements without more did not provide sufficient analysis and 
was insufficient to show the need for or benefit of the requested 
redefinition of ``performance.'' Id. at ]] 226-228. SoundExchange 
pointed to Live365's failure to consider the potential effect of its 
definition of ``performance'' on the per-performance rate presented by 
Drs. Pelcovits and Fratrik. Id. at ] 230. SoundExchange contended that 
if the Live365 performance exclusion proposal were adopted, 
SoundExchange would require an upward adjustment to the per-performance 
rate.\65\ Id.
---------------------------------------------------------------------------

    \65\ According to SoundExchange, the upward adjustment would 
result from a reduction in the number of plays in the calculation of 
a per-performance rate. SX RFF at ] 230.
---------------------------------------------------------------------------

    With regard to the request to redefine ``aggregate tuning hours,'' 
SoundExchange argued that Live365 failed to point to anything in the 
record explaining, much less supporting, the need for the proposed 
change. Id. at ]] 231-232. Live365 offered no evidence or analysis 
regarding the development of a performance rate based on the current 
definition of ``aggregate tuning hours.'' The parties developed their 
evidence regarding the proposed performance royalty rates using the 
existing definition.
    Live365 has not met its burden regarding adoption of these terms. 
The Judges, therefore, decline to adopt either of Live365's proposed 
definitions.
2. Terms Proposed by SoundExchange
    SoundExchange proposed several terms relating to the Webcasters' 
royalties at issue in this proceeding.\66\ The terms proposed by 
SoundExchange follow.
---------------------------------------------------------------------------

    \66\ On October 21, 2013, during the pendency of this remand 
proceeding, SoundExchange filed a petition for rulemaking seeking 
changes to the CRB Notice and Recordkeeping regulations. In the 
petition, SoundExchange proposes changes to: (i) Standardize, 
consolidate, identify, and match reports to facilitate distribution 
of royalties; (ii) conform report formatting of electronic reports, 
including adoption of electronic signatures; (iii) require use of 
the International Standard Recording Code or another unambiguous 
identifier of tracks actually transmitted; (iv) require reports to 
include all performances transmitted by a licensee, even though some 
may not be subject to the statutory license; (v) address late or 
missing Reports of Use by shortening the reporting period, imposing 
late fees, and allowing proxy distributions; (vi) set time limits 
for submission of corrected or amended Reports of Use; (vii) require 
licensees to retain source documents for the data reported on the 
Reports of Use; and (viii) implement several regulatory changes 
denominated by SoundExchange as ``housekeeping.''
---------------------------------------------------------------------------

a. Server Log Retention
    SoundExchange urged the Judges expressly to include server logs as 
records to be retained pursuant to section 380.4(h). See Second Revised 
Rates and Terms of SoundExchange, Inc., Section III.A., Proposed 
Regulations, Sec.  380.4(h) (July 23, 2010); Kessler Corrected WDT at 
27. SoundExchange asserted that retention of these records is required 
under the current regulations, but requested this amendment because not 
all licensees retain server logs. SX PFF at ]] 556-57; Kessler 
Corrected WDT at 27. SoundExchange asserted that ``[t]he evidence 
indicates marketplace acceptance of such a term,'' citing to the CBI/
SoundExchange Agreement which contains an equivalent term. SX PFF at ] 
555.
    In its opposition to this term, Live365 noted that neither the NAB/
SoundExchange Agreement nor the Commercial Webcasters Agreement 
contained this term nor do any of the interactive service agreements 
submitted in this proceeding. Live365 RFF at ] 555. Live365 further 
argued that SoundExchange failed to establish that the benefits to 
SoundExchange of this term outweigh the burden on licensees to comply. 
Id. at ] 557.
    The Judges find that SoundExchange has failed to meet its 
evidentiary burden. None of the interactive agreements in evidence is 
as specific as the regulation SoundExchange proposes. Live365 Exs. 17 
and 18; McCrady WDT, Exs. 104-DR & 106-DR. Rather, the agreements 
require licensees only to retain records relating to their obligations 
under the agreement and in terms no more specific than in the current 
regulation. See, e.g., Live365 Exs. 17 at ] 7(h) and Ex. 18 at ] 7(h); 
McCrady WDT, Exs. 104-DR at ] 6(j) and 106-DR at ] 4(h). Since these 
agreements were negotiated in a setting free from the constraints of 
the regulatory scheme, they provide the best evidence of the agreement 
of a willing buyer and a willing seller in this respect.
    SoundExchange's assertion that inclusion of this term in the CBI/
SoundExchange Agreement constitutes ``marketplace acceptance'' is 
overbroad. As SoundExchange acknowledged, the parties reached agreement 
under atypical marketplace conditions, overshadowed by the possibility 
of a regulatory proceeding. See 9/30/10 Tr. at 547-48 (SoundExchange 
Closing Argument). Furthermore, while the CBI/SoundExchange Agreement 
contains the term, the NAB/SoundExchange and Sirius XM Agreements do 
not, thus undercutting the thrust of the SoundExchange argument.
    SoundExchange failed to note, let alone balance, the burden on 
licensees against the likely benefits from the proposed change. The 
Judges are loathe to adopt a term without such evidence. The Judges 
decline to amend Sec.  380.4(h) to specify server logs.
b. Standardized Forms for Statements of Account
    SoundExchange proposed to require licensees to submit statements of 
account on a standardized form prescribed by SoundExchange. 
SoundExchange asserted that a standard form would simplify licensees' 
calculations of the royalties owed and facilitate SoundExchange's 
efficient collection of information from licensees. SX PFF at ]] 572, 
575. At the time of hearing in this proceeding, SoundExchange provided 
a template statement of account on its Web site. Id. at ] 574. 
SoundExchange noted that noncommercial educational webcasters are 
required pursuant to their WSA agreement to use a form supplied by 
SoundExchange. McCrady WDT, Ex. 103-DP at section 4.4.1.
    Live365 opposed adoption of this term because it would have general 
application, thus affecting parties that did not participate in this 
proceeding. Live365 asserted that a change with such an impact is 
addressed more appropriately in a rulemaking proceeding. Live365 RFF at 
] 574.
    The Judges do not find support in the record for adoption of a 
mandatory standardized statement of account. As Mr. Funn testified, the 
majority of

[[Page 23126]]

webcasters currently use the template form made available on 
SoundExchange's Web site. Funn WRT at 2; 8/2/10 Tr. at 492 (Funn) 
(``much more than half'' of webcasters currently use template). Mr. 
Funn provided no information quantifying the additional work for 
SoundExchange to process a nonconforming statement of account from the 
webcasters that choose not to use the template. Further, neither the 
NAB/SoundExchange Agreement nor the Sirius XM/SoundExchange Agreement 
contains this term. McCrady WDT, Exs. 101-DP and 102-DP.
    Given the already widespread use of SoundExchange's template form, 
the lack of quantification in the record of the time savings to 
SoundExchange by having a standardized form, and SoundExchange's 
failure to include this term in the NAB/SoundExchange and Sirius XM/
SoundExchange Agreements, the Judges find that the record does not 
support the adoption of this term.
c. Identification of Licensees and Late Fee for Reports of Use
    SoundExchange requested that the Judges harmonize identification of 
licensees among the (i) notice of intent to use licenses under sections 
112 and 114, (ii) statements of account, and (iii) reports of use, and 
to impose a late fee for reports of use. These two requests differ from 
the rest of the SoundExchange requests in that these are notice and 
recordkeeping terms.\67\ Ms. Kessler acknowledges, at least with 
respect to the late fees for reports of use, that they could be 
implemented either in the notice and recordkeeping regulations or in 
the license terms. See Kessler WDT at 20-23, 27-28. The Judges decline 
to adopt SoundExchange's proposals regarding the harmonization of 
licensee identification and the imposition of a late fee for reports of 
use. The evidence does not compel amendment of the current 
recordkeeping regulations; rather, these issues are more appropriately 
addressed in a future rulemaking proceeding.
---------------------------------------------------------------------------

    \67\ See n.66, supra. SoundExchange requested these same, or 
similar, changes in an earlier rulemaking, in which the Judges 
imposed census reporting for all services except those broadcasters 
paying no more than the minimum fee. See Comments of SoundExchange, 
Docket No. RM 2008-7, at 20-23 (Jan. 29, 2009). The requests were 
outside the scope of that rulemaking, which was to improve the 
reporting regulations in light of technological developments since 
promulgation of the interim regulation. The Judges deferred 
SoundExchange's requests for consideration in a future rulemaking. 
See Notice and Recordkeeping for Use of Sound Recordings Under 
Statutory License (Final rule), 74 FR 52418, 52422-23 (Oct. 13, 
2009).
---------------------------------------------------------------------------

(1) Identification of Licensees
    SoundExchange asserted that harmonization of the identification of 
licensees can be accomplished by (i) requiring licensees to identify 
themselves on their statements of account and reports of use ``in 
exactly the same way [they are] identified on the corresponding notice 
of use . . . and that they cover the same scope of activity (e.g., the 
same channels or stations),'' SX PFF at ] 568, Kessler WDT at 28; (ii) 
making the regulations clear that the ``Licensee'' is ``the entity 
identified on the notice of use, statement of account, and report of 
use and that each Licensee must submit its own notice of use, statement 
of account, and report of use,'' id. (emphasis in original); and (iii) 
requiring licensees to use an account number issued by SoundExchange. 
Id. at ] 571. Ms. Kessler testified that these proposals would allow 
SoundExchange to match to the requisite notice of use, statement of 
account, and report of use to the correct licensee more quickly and 
efficiently. Kessler WDT at 29; 4/20/10 Tr. at 461 (Kessler). She also 
claimed that, for ``little or no evident cost'' to licensees, their 
accounting and reporting efforts would be simplified by use of an 
account number. Kessler WDT at 29. SoundExchange also asserted that 
these proposals are included in the NAB/SoundExchange and CBI/
SoundExchange Agreements. SX PFF at ] 569. In fact, neither Agreement 
requires use of an account number.
    Live365 did not controvert SoundExchange's proposed findings of 
fact relating to the identification issue, nor did it stipulate to the 
proposed term. As the term is not agreed, the Judges treat it as a 
litigated term. SoundExchange's witness asserted, without evidence, 
that the cost to licensees of conforming their reports and using an 
assigned account number would be minimal. Kessler WDT at 29.
    Conformity of reporting and use of an account number system, 
however, is not a feature of the WSA Agreements in evidence. McCrady 
WDT, Exs. 101-DP (NAB), 102-DP (Commercial Webcasters) and 103-DP 
(CBI). The CBI/SoundExchange Agreement requires that statements of 
account list the licensee's name as it appears on the notice of use, 
see Sec.  380.23(f)(1), but it does not impose that requirement on 
reports of use. Compare McCrady Ex. 103-DP, section 5.2.2 with Sec.  
380.23(g).
    If adopted in this proceeding, therefore, SoundExchange's proposal 
would create an inconsistency within the webcasting regulations. The 
Judges decline to adopt this proposal, but find that the issue would be 
more appropriately addressed in a future rulemaking proceeding.
(2) Late Fee for Reports of Use
    SoundExchange sought imposition of a late fee of 1.5% for reports 
of use. The regulations currently require a late fee for untimely 
payments and statements of account. See 37 CFR 380.4(c). In support of 
this request, Ms. Kessler testified that there was widespread 
noncompliance with reporting requirements. She cited failure to file 
reports of use as well as late or ``grossly inadequate'' reports. 
Kessler WDT at 28. Ms. Kessler testified that noncompliance with the 
report of use and payment requirements significantly hamper 
SoundExchange's ability to make timely royalty distributions. Kessler 
WDT at 28; 4/20/10 Tr. at 458 (Kessler). SoundExchange also points to 
the inclusion of a late fee for untimely reports of use in the NAB/
SoundExchange and CBI/SoundExchange Agreements as further support for 
its request. SX PFF at ] 564.
    Live365 questioned SoundExchange's characterization of a payment as 
being useless without a report of use given that both the NAB/
SoundExchange and CBI/SoundExchange Agreements contain reporting 
waivers. Live365 RCL at ] 20.
    The Judges are not persuaded that a late fee for reports of use is 
necessary. None of the interactive agreements in evidence contains such 
a term. Live365 Exs. 17, 18; McCrady WDT, Exs.104-DR and 106-DR. Only 
the NAB/SoundExchange and CBI/SoundExchange Agreements contain the late 
fee; the parties did not include a late fee in the Sirius XM/
SoundExchange Agreement.
    SoundExchange failed to meet its burden with regard to this 
proposal; the Judges decline to adopt the proposed late fee terms.

C. Contested Terms for Noncommercial Webcasters

    IBS proposed two new terms. The first is an exemption from the 
recordkeeping reporting requirements, or a permissive proxy fee in lieu 
of reporting, for noncommercial webcasters whose usage exceeds 15,914 
ATH per month, but is less than 55,000 ATH per month. The second term 
proposed by IBS is an express authorization that SoundExchange ``may 
elect to accept collective payments on behalf of small and very small 
noncommercial webcasters.'' IBS PFF at ] 26.
    The Judges decline to adopt IBS's proposed subcategories of 
noncommercial webcasters, rendering

[[Page 23127]]

moot their proposed exception from reporting for small and very small 
noncommercial webcasters. Their proposal to create an ad hoc 
subcategory of noncommercial webcasters whose usage falls between 
15,914 and 55,000 ATH suffers from the same defects as their proposal 
to create formal categories for small and very small noncommercial 
webcasters. IBS presented no evidence to support differential treatment 
for webcasters falling in this ad hoc subcategory. While there was 
evidence regarding the appropriateness and desirability of a proxy fee 
for educational noncommercial webcasters, there was no evidence 
presented by any party that the same is true for noncommercial 
webcasters other than educational webcasters (who may already take 
advantage of the CBI/SoundExchange Agreement).
    The Judges decline to adopt IBS's second proposal. As the Judges do 
not recognize IBS's proposed subcategories, the second proposal is 
rendered moot.

VII. Determination and Order

    Having fully considered the record, the Copyright Royalty Judges 
make the above Findings of Fact and Determination based on the record. 
The Judges issue the foregoing as a Final Determination. The Register 
of Copyrights may review the Judges' Final Determination for legal 
error in resolving a material issue of substantive copyright law. The 
Librarian shall cause the Judges' Final Determination, and any 
correction thereto by the Register, to be published in the Federal 
Register no later than the conclusion of the 60-day review period.

    So ordered.

    Dated: February 12, 2014.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.

David R. Strickler,
Copyright Royalty Judge.

Jesse M. Feder,
Copyright Royalty Judge.

List of Subjects in 37 CFR Part 380

    Copyright, Sound recordings.

Final Regulations

0
In consideration of the foregoing, the Copyright Royalty Judges revise 
part 380 of title 37 of the Code of Federal Regulations to read as 
follows:

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

Subpart A--Commercial Webcasters and Noncommercial Webcasters
Sec.
380.1 General.
380.2 Definitions.
380.3 Royalty fees for the public performance of sound recordings 
and for ephemeral recordings.
380.4 Terms for making payment of royalty fees and statements of 
account.
380.5 Confidential Information.
380.6 Verification of royalty payments.
380.7 Verification of royalty distributions.
380.8 Unclaimed funds.
Subpart B--Broadcasters
Sec.
380.10 General.
380.11 Definitions.
380.12 Royalty fees for the public performance of sound recordings 
and for ephemeral recordings.
380.13 Terms for making payment of royalty fees and statements of 
account.
380.14 Confidential Information.
380.15 Verification of royalty payments.
380.16 Verification of royalty distributions.
380.17 Unclaimed funds.
Subpart C--Noncommercial Educational Webcasters
Sec.
380.20 General.
380.21 Definitions.
380.22 Royalty fees for the public performance of sound recordings 
and for ephemeral recordings
380.23 Terms for making payment of royalty fees and statements of 
account.
380.24 Confidential Information.
380.25 Verification of royalty payments.
380.26 Verification of royalty distributions.
380.27 Unclaimed funds.

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

Subpart A--Commercial Webcasters and Noncommercial Webcasters


Sec.  380.1  General.

    (a) Scope. This subpart establishes rates and terms of royalty 
payments for the public performance of sound recordings in certain 
digital transmissions by Licensees as set forth in this subpart in 
accordance with the provisions of 17 U.S.C. 114, and the making of 
Ephemeral Recordings by Licensees in accordance with the provisions of 
17 U.S.C. 112(e), during the period January 1, 2011, through December 
31, 2015.
    (b) Legal compliance. Licensees relying upon the statutory licenses 
set forth in 17 U.S.C. 112(e) and 114 shall comply with the 
requirements of those sections, 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 
transmission within the scope of such agreements.


Sec.  380.2  Definitions.

    For purposes of this subpart, the following definitions shall 
apply:
    Aggregate Tuning Hours (ATH) means the total hours of programming 
that the Licensee has transmitted during the relevant period to all 
listeners within the United States from all channels and stations that 
provide audio programming consisting, in whole or in part, of eligible 
nonsubscription transmissions or noninteractive digital audio 
transmissions as part of a new subscription service, less the actual 
running time of any sound recordings for which the Licensee has 
obtained direct licenses apart from 17 U.S.C. 114(d)(2) or which do not 
require a license under United States copyright law. By way of example, 
if a service transmitted one hour of programming to 10 simultaneous 
listeners, the service's Aggregate Tuning Hours would equal 10. If 3 
minutes of that hour consisted of transmission of a directly licensed 
recording, the service's Aggregate Tuning Hours would equal 9 hours and 
30 minutes. As an additional example, if one listener listened to a 
service for 10 hours (and none of the recordings transmitted during 
that time was directly licensed), the service's Aggregate Tuning Hours 
would equal 10.
    Broadcaster is a type of Licensee that owns and operates a 
terrestrial AM or FM radio station that is licensed by the Federal 
Communications Commission.
    Collective is the collection and distribution organization that is 
designated by the Copyright Royalty Judges. For the 2011-2015 license 
period, the Collective is SoundExchange, Inc.
    Commercial Webcaster is a Licensee, other than a Noncommercial 
Webcaster, that makes eligible digital audio transmissions.
    Copyright Owners are sound recording copyright owners who are 
entitled to royalty payments made under this subpart pursuant to the 
statutory licenses under 17 U.S.C. 112(e) and 114.
    Ephemeral Recording is a phonorecord created for the purpose of

[[Page 23128]]

facilitating a transmission of a public performance of a sound 
recording under a statutory license in accordance with 17 U.S.C. 114, 
and subject to the limitations specified in 17 U.S.C. 112(e).
    Licensee is a person that has obtained a statutory license under 17 
U.S.C. 114, and the implementing regulations, to make eligible 
nonsubscription transmissions, or noninteractive digital audio 
transmissions as part of a new subscription service (as defined in 17 
U.S.C. 114(j)(8)) other than a Service as defined in Sec.  383.2(h) of 
this chapter, or that has obtained a statutory license under 17 U.S.C. 
112(e), and the implementing regulations, to make Ephemeral Recordings 
for use in facilitating such transmissions, but that is not--
    (1) A Broadcaster as defined in Sec.  380.11; or
    (2) A Noncommercial Educational Webcaster as defined in Sec.  
380.21.
    Noncommercial Webcaster is a Licensee that makes eligible digital 
audio transmissions and:
    (1) Is exempt from taxation under section 501 of the Internal 
Revenue Code of 1986 (26 U.S.C. 501),
    (2) Has applied in good faith to the Internal Revenue Service for 
exemption from taxation under section 501 of the Internal Revenue Code 
and has a commercially reasonable expectation that such exemption shall 
be granted, or
    (3) Is operated by a State or possession or any governmental entity 
or subordinate thereof, or by the United States or District of 
Columbia, for exclusively public purposes.
    Performance is each instance in which any portion of a sound 
recording is publicly performed to a listener by means of a digital 
audio transmission (e.g., the delivery of any portion of a single track 
from a compact disc to one listener) but excluding the following:
    (1) A performance of a sound recording that does not require a 
license (e.g., a sound recording that is not copyrighted);
    (2) A performance of a sound recording for which the service has 
previously obtained a license from the Copyright Owner of such sound 
recording; and
    (3) An incidental performance that both:
    (i) Makes no more than incidental use of sound recordings 
including, but not limited to, brief musical transitions in and out of 
commercials or program segments, brief performances during news, talk 
and sports programming, brief background performances during disk 
jockey announcements, brief performances during commercials of sixty 
seconds or less in duration, or brief performances during sporting or 
other public events, and
    (ii) Other than ambient music that is background at a public event, 
does not contain an entire sound recording and does not feature a 
particular sound recording of more than thirty seconds (as in the case 
of a sound recording used as a theme song).
    Performers means the independent administrators identified in 17 
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C. 
114(g)(2)(D).
    Qualified Auditor is a Certified Public Accountant.
    Side Channel is a channel on the Web site of a Broadcaster which 
channel transmits eligible transmissions that are not simultaneously 
transmitted over the air by the Broadcaster.


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

    (a) Royalty rates. Royalty rates and fees for eligible digital 
transmissions of sound recordings made pursuant to 17 U.S.C. 114, and 
the making of ephemeral recordings pursuant to 17 U.S.C. 112(e) are as 
follows:
    (1) Commercial Webcasters. For all digital audio transmissions, 
including simultaneous digital audio retransmissions of over-the-air AM 
or FM radio broadcasts, and related Ephemeral Recordings, a Commercial 
Webcaster will pay a royalty of: $0.0019 per performance for 2011; 
$0.0021 per performance for 2012; $0.0021 per performance for 2013; 
$0.0023 per performance for 2014; and $0.0023 per performance for 2015.
    (2) Noncommercial Webcasters. (i) For all digital audio 
transmissions totaling not more than 159,140 Aggregate Tuning Hours 
(ATH) in a month, including simultaneous digital audio retransmissions 
of over-the-air AM or FM radio broadcasts, and related Ephemeral 
Recordings, a Noncommercial Webcaster will pay an annual per channel or 
per station performance royalty of $500 in 2011, 2012, 2013, 2014, and 
2015.
    (ii) For all digital audio transmissions totaling in excess of 
159,140 Aggregate Tuning Hours (ATH) in a month, including simultaneous 
digital audio retransmissions of over-the-air AM or FM radio 
broadcasts, and related Ephemeral Recordings, a Noncommercial Webcaster 
will pay a royalty of: $0.0019 per performance for 2011; $0.0021 per 
performance for 2012; $0.0021 per performance for 2013; $0.0023 per 
performance for 2014; and $0.0023 per performance for 2015.
    (b) Minimum fee--(1) Commercial Webcasters. Each Commercial 
Webcaster will pay an annual, nonrefundable minimum fee of $500 for 
each calendar year or part of a calendar year of the period 2011-2015 
during which it is a Licensee pursuant to 17 U.S.C. 112(e) or 114. This 
annual minimum fee is payable for each individual channel and each 
individual station maintained by Commercial Webcasters, and is also 
payable for each individual Side Channel maintained by Broadcasters who 
are Commercial Webcasters, provided that a Commercial Webcaster shall 
not be required to pay more than $50,000 per calendar year in minimum 
fees in the aggregate (for 100 or more channels or stations). For each 
such Commercial Webcaster, the annual minimum fee described in this 
paragraph (b)(1) shall constitute the minimum fees due under both 17 
U.S.C. 112(e)(4) and 114(f)(2)(B). Upon payment of the minimum fee, the 
Commercial Webcaster will receive a credit in the amount of the minimum 
fee against any additional royalty fees payable in the same calendar 
year.
    (2) Noncommercial Webcasters. Each Noncommercial Webcaster will pay 
an annual, nonrefundable minimum fee of $500 for each calendar year or 
part of a calendar year of the period 2011-2015 during which it is a 
Licensee pursuant to 17 U.S.C. 112(e) or 114. This annual minimum fee 
is payable for each individual channel and each individual station 
maintained by Noncommercial Webcasters, and is also payable for each 
individual Side Channel maintained by Broadcasters who are 
Noncommercial Webcasters. For each such Noncommercial Webcaster, the 
annual minimum fee described in this paragraph (b)(2) shall constitute 
the minimum fees due under both 17 U.S.C. 112(e)(4) and 114(f)(2)(B). 
Upon payment of the minimum fee, the Noncommercial Webcaster will 
receive a credit in the amount of the minimum fee against any 
additional royalty fees payable in the same calendar year.
    (c) Ephemeral recordings. The royalty payable under 17 U.S.C. 
112(e) for the making of all Ephemeral Recordings used by the Licensee 
solely to facilitate transmissions for which it pays royalties shall be 
included within, and constitute 5% of, the total royalties payable 
under 17 U.S.C. 112(e) and 114.


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

    (a) Payment to the Collective. A Licensee shall make the royalty 
payments due under Sec.  380.3 to the Collective.
    (b) Designation of the Collective. (1) Until such time as a new 
designation is made, SoundExchange, Inc., is

[[Page 23129]]

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

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

    (g) Distribution of royalties. (1) The Collective shall promptly 
distribute royalties received from Licensees to Copyright Owners and 
Performers, or their designated agents, that are entitled to such 
royalties. The Collective shall only be responsible for making 
distributions to those Copyright Owners, Performers, or their 
designated agents who provide the Collective with such information as 
is necessary to identify the correct recipient. The Collective shall 
distribute royalties on a basis that values all performances by a 
Licensee equally based upon the information provided under the reports 
of use requirements for Licensees contained in Sec.  370.4 of this 
chapter.
    (2) If the Collective is unable to locate a Copyright Owner or 
Performer entitled to a distribution of royalties under paragraph 
(g)(1) of this section within 3 years from the date of payment by a 
Licensee, such royalties shall be handled in accordance with Sec.  
380.8.
    (h) Retention of records. Books and records of a Licensee and of 
the Collective relating to payments of and distributions of royalties 
shall be kept for a period of not less than the prior 3 calendar years.


Sec.  380.5  Confidential Information.

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

[[Page 23130]]

during the ordinary course of their work and who require access to the 
Confidential Information; and
    (4) In connection with future proceedings under 17 U.S.C. 112(e) 
and 114 before the Copyright Royalty Judges, and under an appropriate 
protective order, attorneys, consultants and other authorized agents of 
the parties to the proceedings or the courts.
    (e) Safeguarding of Confidential Information. The Collective and 
any person identified in paragraph (d) of this section shall implement 
procedures to safeguard against unauthorized access to or dissemination 
of any Confidential Information using a reasonable standard of care, 
but no less than the same degree of security used to protect 
Confidential Information or similarly sensitive information belonging 
to the Collective or person.


Sec.  380.6  Verification of royalty payments.

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


Sec.  380.7  Verification of royalty distributions.

    (a) General. This section prescribes procedures by which any 
Copyright Owner or Performer may verify the royalty distributions made 
by the Collective; provided, however, that nothing contained in this 
section shall apply to situations where a Copyright Owner or Performer 
and the Collective have agreed as to proper verification methods.
    (b) Frequency of verification. A Copyright Owner or Performer may 
conduct a single audit of the Collective upon reasonable notice and 
during reasonable business hours, during any given calendar year, for 
any or all of the prior 3 calendar years, but no calendar year shall be 
subject to audit more than once.
    (c) Notice of intent to audit. A Copyright Owner or Performer must 
file with the Copyright Royalty Judges a notice of intent to audit the 
Collective, which shall, within 30 days of the filing of the notice, 
publish in the Federal Register a notice announcing such filing. The 
notification of intent to audit shall be served at the same time on the 
Collective. Any audit shall be conducted by an independent and 
Qualified Auditor identified in the notice, and shall be binding on all 
Copyright Owners and Performers.
    (d) Acquisition and retention of report. The Collective shall use 
commercially reasonable efforts to obtain or to provide access to any 
relevant books and records maintained by third parties for the purpose 
of the audit. The Copyright Owner or Performer requesting the 
verification procedure shall retain the report of the verification for 
a period of not less than 3 years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent and Qualified Auditor, shall serve as an acceptable 
verification procedure for all parties with respect to the information 
that is within the scope of the audit.
    (f) Consultation. Before rendering a written report to a Copyright 
Owner or Performer, except where the auditor has a reasonable basis to 
suspect fraud and disclosure would, in the reasonable opinion of the 
auditor, prejudice the investigation of such suspected fraud, the 
auditor shall review the tentative written findings of the audit with 
the appropriate agent or employee of the Collective in order to remedy 
any factual errors and clarify any issues relating to the audit; 
Provided that the appropriate agent or employee of the Collective 
reasonably cooperates with the auditor to remedy promptly any factual 
errors or clarify any issues raised by the audit.
    (g) Costs of the verification procedure. The Copyright Owner or 
Performer requesting the verification procedure shall pay the cost of 
the procedure, unless it is finally determined that there was an 
underpayment of 10% or more, in which case the Collective shall, in 
addition to paying the amount of any underpayment, bear the reasonable 
costs of the verification procedure.


Sec.  380.8  Unclaimed funds.

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

Subpart B--Broadcasters


Sec.  380.10  General.

    (a) Scope. This subpart establishes rates and terms of royalty 
payments for the public performance of sound recordings in certain 
digital transmissions made by Broadcasters as

[[Page 23131]]

set forth herein in accordance with the provisions of 17 U.S.C. 114, 
and the making of Ephemeral Recordings by Broadcasters as set forth 
herein in accordance with the provisions of 17 U.S.C. 112(e), during 
the period January 1, 2011, through December 31, 2015.
    (b) Legal compliance. Broadcasters relying upon the statutory 
licenses set forth in 17 U.S.C. 112(e) and 114 shall comply with the 
requirements of those sections, the rates and terms of this subpart, 
and any other applicable regulations not inconsistent with the rates 
and terms set forth herein.
    (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 
digital audio services shall apply in lieu of the rates and terms of 
this subpart to transmission within the scope of such agreements.


Sec.  380.11  Definitions.

    For purposes of this subpart, the following definitions shall 
apply:
    Aggregate Tuning Hours means the total hours of programming that 
the Broadcaster has transmitted during the relevant period to all 
listeners within the United States from any channels and stations that 
provide audio programming consisting, in whole or in part, of Eligible 
Transmissions.
    Broadcaster means an entity that:
    (1) Has a substantial business owning and operating one or more 
terrestrial AM or FM radio stations that are licensed as such by the 
Federal Communications Commission;
    (2) Has obtained a compulsory license under 17 U.S.C. 112(e) and 
114 and the implementing regulations therefor to make Eligible 
Transmissions and related ephemeral recordings;
    (3) Complies with all applicable provisions of Sections 112(e) and 
114 and applicable regulations; and
    (4) Is not a noncommercial webcaster as defined in 17 U.S.C. 
114(f)(5)(E)(i).
    Broadcaster Webcasts mean eligible nonsubscription transmissions 
made by a Broadcaster over the Internet that are not Broadcast 
Retransmissions.
    Broadcast Retransmissions mean eligible nonsubscription 
transmissions made by a Broadcaster over the Internet that are 
retransmissions of terrestrial over-the-air broadcast programming 
transmitted by the Broadcaster through its AM or FM radio station, 
including ones with substitute advertisements or other programming 
occasionally substituted for programming for which requisite licenses 
or clearances to transmit over the Internet have not been obtained. For 
the avoidance of doubt, a Broadcast Retransmission does not include 
programming that does not require a license under United States 
copyright law or that is transmitted on an Internet-only side channel.
    Collective is the collection and distribution organization that is 
designated by the Copyright Royalty Judges. For the 2011-2015 license 
period, the Collective is SoundExchange, Inc.
    Copyright Owners are sound recording copyright owners who are 
entitled to royalty payments made under this subpart pursuant to the 
statutory licenses under 17 U.S.C. 112(e) and 114(f).
    Eligible Transmission shall mean either a Broadcaster Webcast or a 
Broadcast Retransmission.
    Ephemeral Recording is a phonorecord created for the purpose of 
facilitating an Eligible Transmission of a public performance of a 
sound recording under a statutory license in accordance with 17 U.S.C. 
114(f), and subject to the limitations specified in 17 U.S.C. 112(e).
    Performance is each instance in which any portion of a sound 
recording is publicly performed to a listener by means of a digital 
audio transmission (e.g., the delivery of any portion of a single track 
from a compact disc to one listener) but excluding the following:
    (1) A performance of a sound recording that does not require a 
license (e.g., a sound recording that is not copyrighted);
    (2) A performance of a sound recording for which the Broadcaster 
has previously obtained a license from the Copyright Owner of such 
sound recording; and
    (3) An incidental performance that both:
    (i) Makes no more than incidental use of sound recordings 
including, but not limited to, brief musical transitions in and out of 
commercials or program segments, brief performances during news, talk 
and sports programming, brief background performances during disk 
jockey announcements, brief performances during commercials of sixty 
seconds or less in duration, or brief performances during sporting or 
other public events, and
    (ii) Other than ambient music that is background at a public event, 
does not contain an entire sound recording and does not feature a 
particular sound recording of more than thirty seconds (as in the case 
of a sound recording used as a theme song).
    Performers means the independent administrators identified in 17 
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C. 
114(g)(2)(D).
    Qualified Auditor is a Certified Public Accountant.
    Small Broadcaster is a Broadcaster that, for any of its channels 
and stations (determined as provided in Sec.  380.12(c)) over which it 
transmits Broadcast Retransmissions, and for all of its channels and 
stations over which it transmits Broadcaster Webcasts in the aggregate, 
in any calendar year in which it is to be considered a Small 
Broadcaster, meets the following additional eligibility criteria:
    (1) During the prior year it made Eligible Transmissions totaling 
less than 27,777 Aggregate Tuning Hours; and
    (2) During the applicable year it reasonably expects to make 
Eligible Transmissions totaling less than 27,777 Aggregate Tuning 
Hours; provided that, one time during the period 2011-2015, a 
Broadcaster that qualified as a Small Broadcaster under the foregoing 
definition as of January 31 of one year, elected Small Broadcaster 
status for that year, and unexpectedly made Eligible Transmissions on 
one or more channels or stations in excess of 27,777 aggregate tuning 
hours during that year, may choose to be treated as a Small Broadcaster 
during the following year notwithstanding paragraph (1) of the 
definition of ``Small Broadcaster'' if it implements measures 
reasonably calculated to ensure that it will not make Eligible 
Transmissions exceeding 27,777 aggregate tuning hours during that 
following year. As to channels or stations over which a Broadcaster 
transmits Broadcast Retransmissions, the Broadcaster may elect Small 
Broadcaster status only with respect to any of its channels or stations 
that meet all of the foregoing criteria.


Sec.  380.12  Royalty fees for the public performance of sound 
recordings and for ephemeral recordings.

    (a) Royalty rates. Royalties for Eligible Transmissions made 
pursuant to 17 U.S.C. 114, and the making of related ephemeral 
recordings pursuant to 17 U.S.C. 112(e), shall, except as provided in 
Sec.  380.13(g)(3), be payable on a per-performance basis, as follows:
    (1) 2011: $0.0017;
    (2) 2012: $0.0020;
    (3) 2013: $0.0022;
    (4) 2014: $0.0023;
    (5) 2015: $0.0025.
    (b) Ephemeral royalty. The royalty payable under 17 U.S.C. 112(e) 
for any reproduction of a phonorecord made by a Broadcaster during this 
license period and used solely by the Broadcaster to facilitate 
transmissions for which it pays royalties as and when provided in this

[[Page 23132]]

section is deemed to be included within such royalty payments and to 
equal the percentage of such royalty payments determined by the 
Copyright Royalty Judges for other webcasting as set forth in Sec.  
380.3.
    (c) Minimum fee. Each Broadcaster will pay an annual, nonrefundable 
minimum fee of $500 for each of its individual channels, including each 
of its individual side channels, and each of its individual stations, 
through which (in each case) it makes Eligible Transmissions, for each 
calendar year or part of a calendar year during 2011-2015 during which 
the Broadcaster is a licensee pursuant to licenses under 17 U.S.C. 
112(e) and 114, provided that a Broadcaster shall not be required to 
pay more than $50,000 in minimum fees in the aggregate (for 100 or more 
channels or stations). For the purpose of this subpart, each individual 
stream (e.g., HD radio side channels, different stations owned by a 
single licensee) will be treated separately and be subject to a 
separate minimum, except that identical streams for simulcast stations 
will be treated as a single stream if the streams are available at a 
single Uniform Resource Locator (URL) and performances from all such 
stations are aggregated for purposes of determining the number of 
payable performances hereunder. Upon payment of the minimum fee, the 
Broadcaster will receive a credit in the amount of the minimum fee 
against any additional royalties payable for the same calendar year for 
the same channel or station. In addition, an electing Small Broadcaster 
also shall pay a $100 annual fee (the ``Proxy Fee'') to the Collective 
for the reporting waiver discussed in Sec.  380.13(g)(2).


Sec.  380.13  Terms for making payment of royalty fees and statements 
of account.

    (a) Payment to the Collective. A Broadcaster shall make the royalty 
payments due under Sec.  380.12 to the Collective.
    (b) Designation of the Collective. (1) Until such time as a new 
designation is made, SoundExchange, Inc., is designated as the 
Collective to receive statements of account and royalty payments from 
Broadcasters due under Sec.  380.12 and to distribute such royalty 
payments to each Copyright Owner and Performer, or their designated 
agents, entitled to receive royalties under 17 U.S.C. 112(e) and 
114(g).
    (2) If SoundExchange, Inc. should dissolve or cease to be governed 
by a board consisting of equal numbers of representatives of Copyright 
Owners and Performers, then it shall be replaced by a successor 
Collective upon the fulfillment of the requirements set forth in 
paragraph (b)(2)(i) of this section.
    (i) By a majority vote of the nine Copyright Owner representatives 
and the nine Performer representatives on the SoundExchange board as of 
the last day preceding the condition precedent in paragraph (b)(2) of 
this section, such representatives shall file a petition with the 
Copyright Royalty Board designating a successor to collect and 
distribute royalty payments to Copyright Owners and Performers entitled 
to receive royalties under 17 U.S.C. 112(e) or 114(g) that have 
themselves authorized such Collective.
    (ii) The Copyright Royalty Judges shall publish in the Federal 
Register within 30 days of receipt of a petition filed under paragraph 
(b)(2)(i) of this section an order designating the Collective named in 
such petition.
    (c) Monthly payments and reporting. Broadcasters must make monthly 
payments where required by Sec.  380.12, and provide statements of 
account and reports of use, for each month on the 45th day following 
the month in which the Eligible Transmissions subject to the payments, 
statements of account, and reports of use were made. All monthly 
payments shall be rounded to the nearest cent.
    (d) Minimum payments. A Broadcaster shall make any minimum payment 
due under Sec.  380.12(b) by January 31 of the applicable calendar 
year, except that payment by a Broadcaster that was not making Eligible 
Transmissions or Ephemeral Recordings pursuant to the licenses in 17 
U.S.C. 114 and/or 17 U.S.C. 112(e) as of said date but begins doing so 
thereafter shall be due by the 45th day after the end of the month in 
which the Broadcaster commences to do so.
    (e) Late fees. A Broadcaster shall pay a late fee for each instance 
in which any payment, any statement of account or any report of use is 
not received by the Collective in compliance with applicable 
regulations by the due date. The amount of the late fee shall be 1.5% 
of a late payment, or 1.5% of the payment associated with a late 
statement of account or report of use, per month, or the highest lawful 
rate, whichever is lower. The late fee shall accrue from the due date 
of the payment, statement of account or report of use until a fully 
compliant payment, statement of account or report of use is received by 
the Collective, provided that, in the case of a timely provided but 
noncompliant statement of account or report of use, the Collective has 
notified the Broadcaster within 90 days regarding any noncompliance 
that is reasonably evident to the Collective.
    (f) Statements of account. Any payment due under Sec.  380.12 shall 
be accompanied by a corresponding statement of account. A statement of 
account shall contain the following information:
    (1) Such information as is necessary to calculate the accompanying 
royalty payment;
    (2) The name, address, business title, telephone number, facsimile 
number (if any), electronic mail address (if any) and other contact 
information of the person to be contacted for information or questions 
concerning the content of the statement of account;
    (3) The handwritten signature of:
    (i) The owner of the Broadcaster or a duly authorized agent of the 
owner, if the Broadcaster is not a partnership or corporation;
    (ii) A partner or delegee, if the Broadcaster is a partnership; or
    (iii) An officer of the corporation, if the Broadcaster is a 
corporation.
    (4) The printed or typewritten name of the person signing the 
statement of account;
    (5) The date of signature;
    (6) If the Broadcaster is a partnership or corporation, the title 
or official position held in the partnership or corporation by the 
person signing the statement of account;
    (7) A certification of the capacity of the person signing; and
    (8) A statement to the following effect:

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

    (g) Reporting by Broadcasters in General. (1) Broadcasters other 
than electing Small Broadcasters covered by paragraph (g)(2) of this 
section shall submit reports of use on a per-performance basis in 
compliance with the regulations set forth in part 370 of this chapter, 
except that the following provisions shall apply notwithstanding the 
provisions of such part 370 of this chapter from time to time in 
effect:
    (i) Broadcasters may pay for, and report usage in, a percentage of 
their programming hours on an Aggregate Tuning Hour basis as provided 
in paragraph (g)(3) of this section.
    (ii) Broadcasters shall submit reports of use to the Collective on 
a monthly basis.
    (iii) As provided in paragraph (d) of this section, Broadcasters 
shall submit reports of use by no later than the 45th day following the 
last day of the month to which they pertain.

[[Page 23133]]

    (iv) Except as provided in paragraph (g)(3) of this section, 
Broadcasters shall submit reports of use to the Collective on a census 
reporting basis (i.e., reports of use shall include every sound 
recording performed in the relevant month and the number of 
performances thereof).
    (v) Broadcasters shall either submit a separate report of use for 
each of their stations, or a collective report of use covering all of 
their stations but identifying usage on a station-by-station basis;
    (vi) Broadcasters shall transmit each report of use in a file the 
name of which includes:
    (A) The name of the Broadcaster, exactly as it appears on its 
notice of use, and
    (B) If the report covers a single station only, the call letters of 
the station.
    (vii) Broadcasters shall submit reports of use with headers, as 
presently described in Sec.  370.4(e)(7) of this chapter.
    (viii) Broadcasters shall submit a separate statement of account 
corresponding to each of their reports of use, transmitted in a file 
the name of which includes:
    (A) The name of the Broadcaster, exactly as it appears on its 
notice of use, and
    (B) If the statement covers a single station only, the call letters 
of the station.
    (2) On a transitional basis for a limited time in light of the 
unique business and operational circumstances currently existing with 
respect to Small Broadcasters and with the expectation that Small 
Broadcasters will be required, effective January 1, 2016, to report 
their actual usage in compliance with then-applicable regulations. 
Small Broadcasters that have made an election pursuant to paragraph (h) 
of this section for the relevant year shall not be required to provide 
reports of their use of sound recordings for Eligible Transmissions and 
related Ephemeral Recordings. The immediately preceding sentence 
applies even if the Small Broadcaster actually makes Eligible 
Transmissions for the year exceeding 27,777 Aggregate Tuning Hours, so 
long as it qualified as a Small Broadcaster at the time of its election 
for that year. In addition to minimum royalties hereunder, electing 
Small Broadcasters will pay to the Collective a $100 Proxy Fee to 
defray costs associated with this reporting waiver, including 
development of proxy usage data.
    (3) Broadcasters generally reporting pursuant to paragraph (g)(1) 
of this section may pay for, and report usage in, a percentage of their 
programming hours on an Aggregate Tuning Hours basis, if:
    (i) Census reporting is not reasonably practical for the 
programming during those hours, and
    (ii) If the total number of hours on a single report of use, 
provided pursuant to paragraph (g)(1) of this section, for which this 
type of reporting is used is below the maximum percentage set forth 
below for the relevant year:
    (A) 2011: 16%;
    (B) 2012: 14%;
    (C) 2013: 12%;
    (D) 2014: 10%;
    (E) 2015: 8%.
    (iii) To the extent that a Broadcaster chooses to report and pay 
for usage on an Aggregate Tuning Hours basis pursuant to paragraph 
(g)(3) of this section, the Broadcaster shall
    (A) Report and pay based on the assumption that the number of sound 
recordings performed during the relevant programming hours is 12 per 
hour;
    (B) Pay royalties (or recoup minimum fees) at the per-performance 
rates provided in Sec.  380.12 on the basis of paragraph (g)(3)(iii)(A) 
of this section;
    (C) Include Aggregate Tuning Hours in reports of use; and
    (D) Include in reports of use complete playlist information for 
usage reported on the basis of Aggregate Tuning Hours.
    (h) Election of Small Broadcaster Status. To be eligible for the 
reporting waiver for Small Broadcasters with respect to any particular 
channel in a given year, a Broadcaster must satisfy the definition set 
forth in Sec.  380.11 and must submit to the Collective a completed and 
signed election form (available on the SoundExchange Web site at https://www.soundexchange.com) by no later than January 31 of the applicable 
year. Even if a Broadcaster has once elected to be treated as a Small 
Broadcaster, it must make a separate, timely election in each 
subsequent year in which it wishes to be treated as a Small 
Broadcaster.
    (i) Distribution of royalties. (1) The Collective shall promptly 
distribute royalties received from Broadcasters to Copyright Owners and 
Performers, or their designated agents, that are entitled to such 
royalties. The Collective shall only be responsible for making 
distributions to those Copyright Owners, Performers, or their 
designated agents who provide the Collective with such information as 
is necessary to identify and pay the correct recipient. The Collective 
shall distribute royalties on a basis that values all performances by a 
Broadcaster equally based upon information provided under the report of 
use requirements for Broadcasters contained in Sec.  370.4 of this 
chapter and this subpart, except that in the case of electing Small 
Broadcasters, the Collective shall distribute royalties based on proxy 
usage data in accordance with a methodology adopted by the Collective's 
Board of Directors.
    (2) If the Collective is unable to locate a Copyright Owner or 
Performer entitled to a distribution of royalties under paragraph 
(g)(1) of this section within 3 years from the date of payment by a 
Broadcaster, such distribution may be first applied to the costs 
directly attributable to the administration of that distribution. The 
foregoing shall apply notwithstanding the common law or statutes of any 
State.
    (j) Retention of records. Books and records of a Broadcaster and of 
the Collective relating to payments of and distributions of royalties 
shall be kept for a period of not less than the prior 3 calendar years.


Sec.  380.14  Confidential Information.

    (a) Definition. For purposes of this subpart, ``Confidential 
Information'' shall include the statements of account and any 
information contained therein, including the amount of royalty 
payments, and any information pertaining to the statements of account 
reasonably designated as confidential by the Broadcaster submitting the 
statement.
    (b) Exclusion. Confidential Information shall not include documents 
or information that at the time of delivery to the Collective are 
public knowledge. The party claiming the benefit of this provision 
shall have the burden of proving that the disclosed information was 
public knowledge.
    (c) Use of Confidential Information. In no event shall the 
Collective use any Confidential Information for any purpose other than 
royalty collection and distribution and activities related directly 
thereto.
    (d) Disclosure of Confidential Information. Access to Confidential 
Information shall be limited to:
    (1) Those employees, agents, attorneys, consultants and independent 
contractors of the Collective, subject to an appropriate 
confidentiality agreement, who are engaged in the collection and 
distribution of royalty payments hereunder and activities related 
thereto, for the purpose of performing such duties during the ordinary 
course of their work and who require access to the Confidential 
Information;
    (2) An independent and Qualified Auditor, subject to an appropriate 
confidentiality agreement, who is authorized to act on behalf of the

[[Page 23134]]

Collective with respect to verification of a Broadcaster's statement of 
account pursuant to Sec.  380.15 or on behalf of a Copyright Owner or 
Performer with respect to the verification of royalty distributions 
pursuant to Sec.  380.16;
    (3) Copyright Owners and Performers, including their designated 
agents, whose works have been used under the statutory licenses set 
forth in 17 U.S.C. 112(e) and 114(f) by the Broadcaster whose 
Confidential Information is being supplied, subject to an appropriate 
confidentiality agreement, and including those employees, agents, 
attorneys, consultants and independent contractors of such Copyright 
Owners and Performers and their designated agents, subject to an 
appropriate confidentiality agreement, for the purpose of performing 
their duties during the ordinary course of their work and who require 
access to the Confidential Information; and
    (4) In connection with future proceedings under 17 U.S.C. 112(e) 
and 114(f) before the Copyright Royalty Judges, and under an 
appropriate protective order, attorneys, consultants and other 
authorized agents of the parties to the proceedings or the courts.
    (e) Safeguarding of Confidential Information. The Collective and 
any person identified in paragraph (d) of this section shall implement 
procedures to safeguard against unauthorized access to or dissemination 
of any Confidential Information using a reasonable standard of care, 
but not less than the same degree of security used to protect 
Confidential Information or similarly sensitive information belonging 
to the Collective or person.


Sec.  380.15  Verification of royalty payments.

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


Sec.  380.16  Verification of royalty distributions.

    (a) General. This section prescribes procedures by which any 
Copyright Owner or Performer may verify the royalty distributions made 
by the Collective; provided, however, that nothing contained in this 
section shall apply to situations where a Copyright Owner or Performer 
and the Collective have agreed as to proper verification methods.
    (b) Frequency of verification. A Copyright Owner or Performer may 
conduct a single audit of the Collective upon reasonable notice and 
during reasonable business hours, during any given calendar year, for 
any or all of the prior 3 calendar years, but no calendar year shall be 
subject to audit more than once.
    (c) Notice of intent to audit. A Copyright Owner or Performer must 
file with the Copyright Royalty Board a notice of intent to audit the 
Collective, which shall, within 30 days of the filing of the notice, 
publish in the Federal Register a notice announcing such filing. The 
notification of intent to audit shall be served at the same time on the 
Collective. Any audit shall be conducted by an independent and 
Qualified Auditor identified in the notice, and shall be binding on all 
Copyright Owners and Performers.
    (d) Acquisition and retention of report. The Collective shall use 
commercially reasonable efforts to obtain or to provide access to any 
relevant books and records maintained by third parties for the purpose 
of the audit. The Copyright Owner or Performer requesting the 
verification procedure shall retain the report of the verification for 
a period of not less than 3 years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent and Qualified Auditor, shall serve as an acceptable 
verification procedure for all parties with respect to the information 
that is within the scope of the audit.
    (f) Consultation. Before rendering a written report to a Copyright 
Owner or Performer, except where the auditor has a reasonable basis to 
suspect fraud and disclosure would, in the reasonable opinion of the 
auditor, prejudice the investigation of such suspected fraud, the 
auditor shall review the tentative written findings of the audit with 
the appropriate agent or employee of the Collective in order to remedy 
any factual errors and clarify any issues relating to the audit; 
Provided that the appropriate agent or employee of the Collective 
reasonably cooperates with the auditor to remedy promptly any factual 
errors or clarify any issues raised by the audit.
    (g) Costs of the verification procedure. The Copyright Owner or 
Performer requesting the verification procedure shall pay the cost of 
the procedure, unless it is finally determined that there was an 
underpayment of 10% or more, in which case the Collective shall, in 
addition to paying the amount of any underpayment, bear the reasonable 
costs of the verification procedure.


Sec.  380.17  Unclaimed funds.

    If the Collective is unable to identify or locate a Copyright Owner 
or Performer who is entitled to receive a royalty distribution under 
this subpart,

[[Page 23135]]

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

Subpart C--Noncommercial Educational Webcasters


Sec.  380.20  General.

    (a) Scope. This subpart establishes rates and terms, including 
requirements for royalty payments, recordkeeping and reports of use, 
for the public performance of sound recordings in certain digital 
transmissions made by Noncommercial Educational Webcasters as set forth 
herein in accordance with the provisions of 17 U.S.C. 114, and the 
making of Ephemeral Recordings by Noncommercial Educational Webcasters 
as set forth herein in accordance with the provisions of 17 U.S.C. 
112(e), during the period January 1, 2011, through December 31, 2015.
    (b) Legal compliance. Noncommercial Educational Webcasters relying 
upon the statutory licenses set forth in 17 U.S.C. 112(e) and 114 shall 
comply with the requirements of those sections, the rates and terms of 
this subpart, and any other applicable regulations not inconsistent 
with the rates and terms set forth herein.
    (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 
digital audio services shall apply in lieu of the rates and terms of 
this subpart to transmissions within the scope of such agreements.


Sec.  380.21  Definitions.

    For purposes of this subpart, the following definitions shall 
apply:
    ATH or Aggregate Tuning Hours means the total hours of programming 
that a Noncommercial Educational Webcaster has transmitted during the 
relevant period to all listeners within the United States over all 
channels and stations that provide audio programming consisting, in 
whole or in part, of Eligible Transmissions, including from any 
archived programs, less the actual running time of any sound recordings 
for which the Noncommercial Educational Webcaster has obtained direct 
licenses apart from 17 U.S.C. 114(d)(2) or which do not require a 
license under United States copyright law. By way of example, if a 
Noncommercial Educational Webcaster transmitted one hour of programming 
to 10 simultaneous listeners, the Noncommercial Educational Webcaster's 
Aggregate Tuning Hours would equal 10. If three minutes of that hour 
consisted of transmission of a directly licensed recording, the 
Noncommercial Educational Webcaster's Aggregate Tuning Hours would 
equal 9 hours and 30 minutes. As an additional example, if one listener 
listened to a Noncommercial Educational Webcaster for 10 hours (and 
none of the recordings transmitted during that time was directly 
licensed), the Noncommercial Educational Webcaster's Aggregate Tuning 
Hours would equal 10.
    Collective is the collection and distribution organization that is 
designated by the Copyright Royalty Judges. For the 2011-2015 license 
period, the Collective is SoundExchange, Inc.
    Copyright Owners are sound recording copyright owners who are 
entitled to royalty payments made under this subpart pursuant to the 
statutory licenses under 17 U.S.C. 112(e) and 114(f).
    Eligible Transmission means an eligible nonsubscription 
transmission made by a Noncommercial Educational Webcaster over the 
Internet.
    Ephemeral Recording is a phonorecord created for the purpose of 
facilitating an Eligible Transmission of a public performance of a 
sound recording under a statutory license in accordance with 17 U.S.C. 
114(f), and subject to the limitations specified in 17 U.S.C. 112(e).
    Noncommercial Educational Webcaster means Noncommercial Webcaster 
(as defined in 17 U.S.C. 114(f)(5)(E)(i)) that:
    (1) Has obtained a compulsory license under 17 U.S.C. 112(e) and 
114 and the implementing regulations therefor to make Eligible 
Transmissions and related ephemeral recordings;
    (2) Complies with all applicable provisions of Sections 112(e) and 
114 and applicable regulations;
    (3) Is directly operated by, or is affiliated with and officially 
sanctioned by, and the digital audio transmission operations of which 
are staffed substantially by students enrolled at, a domestically 
accredited primary or secondary school, college, university or other 
post-secondary degree-granting educational institution; and
    (4) Is not a ``public broadcasting entity'' (as defined in 17 
U.S.C. 118(g)) qualified to receive funding from the Corporation for 
Public Broadcasting pursuant to the criteria set forth in 47 U.S.C. 
396.
    Performance is each instance in which any portion of a sound 
recording is publicly performed to a listener by means of a digital 
audio transmission (e.g., the delivery of any portion of a single track 
from a compact disc to one listener) but excluding the following:
    (1) A performance of a sound recording that does not require a 
license (e.g., a sound recording that is not copyrighted);
    (2) A performance of a sound recording for which the Noncommercial 
Educational Webcaster has previously obtained a license from the 
Copyright Owner of such sound recording; and
    (3) An incidental performance that both:
    (i) Makes no more than incidental use of sound recordings, 
including, but not limited to, brief musical transitions in and out of 
commercials or program segments, brief performances during news, talk 
and sports programming, brief background performances during disk 
jockey announcements, brief performances during commercials of sixty 
seconds or less in duration, or brief performances during sporting or 
other public events; and
    (ii) Other than ambient music that is background at a public event, 
does not contain an entire sound recording and does not feature a 
particular sound recording of more than thirty seconds (as in the case 
of a sound recording used as a theme song).
    Performers means the independent administrators identified in 17 
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C. 
114(g)(2)(D).
    Qualified Auditor is a Certified Public Accountant.


Sec.  380.22  Royalty fees for the public performance of sound 
recordings and for ephemeral recordings.

    (a) Minimum fee. Each Noncommercial Educational Webcaster shall pay 
an annual, nonrefundable minimum fee of $500 (the ``Minimum Fee'') for 
each of its individual channels, including each of its individual side 
channels, and each of its individual stations, through which (in each 
case) it makes Eligible Transmissions, for each calendar year it makes 
Eligible Transmissions subject to this subpart. For clarity, each 
individual stream (e.g., HD radio side channels, different stations 
owned by a single licensee) will be treated separately and be subject 
to a separate minimum. In addition, a Noncommercial Educational 
Webcaster electing the reporting waiver

[[Page 23136]]

described in Sec.  380.23(g)(1), shall pay a $100 annual fee (the 
``Proxy Fee'') to the Collective.
    (b) Additional usage fees. If, in any month, a Noncommercial 
Educational Webcaster makes total transmissions in excess of 159,140 
Aggregate Tuning Hours on any individual channel or station, the 
Noncommercial Educational Webcaster shall pay additional usage fees 
(``Usage Fees'') for the Eligible Transmissions it makes on that 
channel or station after exceeding 159,140 total ATH at the following 
per-performance rates:
    (1) 2011: $0.0017;
    (2) 2012: $0.0020;
    (3) 2013: $0.0022;
    (4) 2014: $0.0023;
    (5) 2015: $0.0025.
    (6) For a Noncommercial Educational Webcaster unable to calculate 
actual total performances and not required to report ATH or actual 
total performances under Sec.  380.23(g)(3), the Noncommercial 
Educational Webcaster may pay its Usage Fees on an ATH basis, provided 
that the Noncommercial Educational Webcaster shall pay its Usage Fees 
at the per-performance rates provided in paragraphs (b)(1) through (5) 
of this section based on the assumption that the number of sound 
recordings performed is 12 per hour. The Collective may distribute 
royalties paid on the basis of ATH hereunder in accordance with its 
generally applicable methodology for distributing royalties paid on 
such basis. In addition, and for the avoidance of doubt, a 
Noncommercial Educational Webcaster offering more than one channel or 
station shall pay Usage Fees on a per-channel or -station basis.
    (c) Ephemeral royalty. The royalty payable under 17 U.S.C. 112(e) 
for any ephemeral reproductions made by a Noncommercial Educational 
Webcaster and covered by this subpart is deemed to be included within 
the royalty payments set forth in paragraphs (a) and (b)(1) through (5) 
of this section and to equal the percentage of such royalty payments 
determined by the Copyright Royalty Judges for other webcasting in 
Sec.  380.3.


Sec.  380.23  Terms for making payment of royalty fees and statements 
of account.

    (a) Payment to the Collective. A Noncommercial Educational 
Webcaster shall make the royalty payments due under Sec.  380.22 to the 
Collective.
    (b) Designation of the Collective. (1) Until such time as a new 
designation is made, SoundExchange, Inc., is designated as the 
Collective to receive statements of account and royalty payments from 
Noncommercial Educational Webcasters due under Sec.  380.22 and to 
distribute such royalty payments to each Copyright Owner and Performer, 
or their designated agents, entitled to receive royalties under 17 
U.S.C. 112(e) or 114(g).
    (2) If SoundExchange, Inc., should dissolve or cease to be governed 
by a board consisting of equal numbers of representatives of Copyright 
Owners and Performers, then it shall be replaced by a successor 
Collective upon the fulfillment of the requirements set forth in 
paragraph (b)(2)(i) of this section.
    (i) By a majority vote of the nine Copyright Owner representatives 
and the nine Performer representatives on the SoundExchange board as of 
the last day preceding the condition precedent in this paragraph 
(b)(2), such representatives shall file a petition with the Copyright 
Royalty Board designating a successor to collect and distribute royalty 
payments to Copyright Owners and Performers entitled to receive 
royalties under 17 U.S.C. 112(e) or 114(g) that have themselves 
authorized such Collective.
    (ii) The Copyright Royalty Judges shall publish in the Federal 
Register within 30 days of receipt of a petition filed under paragraph 
(b)(2)(i) of this section an order designating the Collective named in 
such petition.
    (c) Minimum fee. Noncommercial Educational Webcasters shall submit 
the Minimum Fee, and Proxy Fee if applicable, accompanied by a 
statement of account, by January 31st of each calendar year, except 
that payment of the Minimum Fee, and Proxy Fee if applicable, by a 
Noncommercial Educational Webcaster that was not making Eligible 
Transmissions or Ephemeral Recordings pursuant to the licenses in 17 
U.S.C. 114 and/or 17 U.S.C. 112(e) as of said date but begins doing so 
thereafter shall be due by the 45th day after the end of the month in 
which the Noncommercial Educational Webcaster commences doing so. 
Payments of minimum fees must be accompanied by a certification, signed 
by an officer or another duly authorized faculty member or 
administrator of the institution with which the Noncommercial 
Educational Webcaster is affiliated, on a form provided by the 
Collective, that the Noncommercial Educational Webcaster:
    (1) Qualifies as a Noncommercial Educational Webcaster for the 
relevant year; and
    (2) Did not exceed 159,140 total ATH in any month of the prior year 
for which the Noncommercial Educational Webcaster did not submit a 
statement of account and pay any required Usage Fees. At the same time 
the Noncommercial Educational Webcaster must identify all its stations 
making Eligible Transmissions and identify which of the reporting 
options set forth in paragraph (g) of this section it elects for the 
relevant year (provided that it must be eligible for the option it 
elects).
    (d) Usage fees. In addition to its obligations pursuant to 
paragraph (c) of this section, a Noncommercial Educational Webcaster 
must make monthly payments of Usage Fees where required by Sec.  
380.22(b), and provide statements of account to accompany these 
payments, for each month on the 45th day following the month in which 
the Eligible Transmissions subject to the Usage Fees and statements of 
account were made. All monthly payments shall be rounded to the nearest 
cent.
    (e) Late fees. A Noncommercial Educational Webcaster shall pay a 
late fee for each instance in which any payment, any statement of 
account or any report of use is not received by the Collective in 
compliance with the applicable regulations by the due date. The amount 
of the late fee shall be 1.5% of the late payment, or 1.5% of the 
payment associated with a late statement of account or report of use, 
per month, compounded monthly for the balance due, or the highest 
lawful rate, whichever is lower. The late fee shall accrue from the due 
date of the payment, statement of account or report of use until a 
fully compliant payment, statement of account or report of use (as 
applicable) is received by the Collective, provided that, in the case 
of a timely provided but noncompliant statement of account or report of 
use, the Collective has notified the Noncommercial Educational 
Webcaster within 90 days regarding any noncompliance that is reasonably 
evident to the Collective.
    (f) Statements of account. Any payment due under Sec.  380.22 shall 
be accompanied by a corresponding statement of account. A statement of 
account shall contain the following information:
    (1) The name of the Noncommercial Educational Webcaster, exactly as 
it appears on the notice of use, and if the statement of account covers 
a single station only, the call letters or name of the station;
    (2) Such information as is necessary to calculate the accompanying 
royalty payment as prescribed in this subpart;
    (3) The name, address, business title, telephone number, facsimile 
number (if any), electronic mail address (if any) and other contact 
information of the person to be contacted for information or questions 
concerning the content of the statement of account;

[[Page 23137]]

    (4) The handwritten signature of an officer or another duly 
authorized faculty member or administrator of the applicable 
educational institution;
    (5) The printed or typewritten name of the person signing the 
statement of account;
    (6) The date of signature;
    (7) The title or official position held by the person signing the 
statement of account;
    (8) A certification of the capacity of the person signing; and
    (9) A statement to the following effect:

    I, the undersigned officer or other duly authorized faculty member 
or administrator of the applicable educational institution, have 
examined this statement of account and hereby state that it is true, 
accurate, and complete to my knowledge after reasonable due diligence.

    (g) Reporting by Noncommercial Educational Webcasters in general--
(1) Reporting waiver. In light of the unique business and operational 
circumstances currently existing with respect to Noncommercial 
Educational Webcasters, and for the purposes of this subpart only, a 
Noncommercial Educational Webcaster that did not exceed 55,000 total 
ATH for any individual channel or station for more than one calendar 
month in the immediately preceding calendar year and that does not 
expect to exceed 55,000 total ATH for any individual channel or station 
for any calendar month during the applicable calendar year may elect to 
pay to the Collective a nonrefundable, annual Proxy Fee of $100 in lieu 
of providing reports of use for the calendar year pursuant to the 
regulations at Sec.  370.4 of this chapter. In addition, a 
Noncommercial Educational Webcaster that unexpectedly exceeded 55,000 
total ATH on one or more channels or stations for more than one month 
during the immediately preceding calendar year may elect to pay the 
Proxy Fee and receive the reporting waiver described in this paragraph 
(g)(1) during a calendar year, if it implements measures reasonably 
calculated to ensure that it will not make Eligible Transmissions 
exceeding 55,000 total ATH during any month of that calendar year. The 
Proxy Fee is intended to defray the Collective's costs associated with 
this reporting waiver, including development of proxy usage data. The 
Proxy Fee shall be paid by the date specified in paragraph (c) of this 
section for paying the Minimum Fee for the applicable calendar year and 
shall be accompanied by a certification on a form provided by the 
Collective, signed by an officer or another duly authorized faculty 
member or administrator of the applicable educational institution, 
stating that the Noncommercial Educational Webcaster is eligible for 
the Proxy Fee option because of its past and expected future usage and, 
if applicable, has implemented measures to ensure that it will not make 
excess Eligible Transmissions in the future.
    (2) Sample-basis reports. A Noncommercial Educational Webcaster 
that did not exceed 159,140 total ATH for any individual channel or 
station for more than one calendar month in the immediately preceding 
calendar year and that does not expect to exceed 159,140 total ATH for 
any individual channel or station for any calendar month during the 
applicable calendar year may elect to provide reports of use on a 
sample basis (two weeks per calendar quarter) in accordance with the 
regulations at Sec.  370.4 of this chapter, except that, 
notwithstanding Sec.  370.4(d)(2)(vi), such an electing Noncommercial 
Educational Webcaster shall not be required to include ATH or actual 
total performances and may in lieu thereof provide channel or station 
name and play frequency. Notwithstanding the foregoing, a Noncommercial 
Educational Webcaster that is able to report ATH or actual total 
performances is encouraged to do so. These reports of use shall be 
submitted to the Collective no later than January 31st of the year 
immediately following the year to which they pertain.
    (3) Census-basis reports. If any of the following three conditions 
is satisfied, a Noncommercial Educational Webcaster must report 
pursuant to this paragraph (g)(3):
    (i) The Noncommercial Educational Webcaster exceeded 159,140 total 
ATH for any individual channel or station for more than one calendar 
month in the immediately preceding calendar year;
    (ii) The Noncommercial Educational Webcaster expects to exceed 
159,140 total ATH for any individual channel or station for any 
calendar month in the applicable calendar year; or
    (iii) The Noncommercial Educational Webcaster otherwise does not 
elect to be subject to paragraphs (g)(1) or (2) of this section. A 
Noncommercial Educational Webcaster required to report pursuant to 
paragraph (g)(3) of this section shall provide reports of use to the 
Collective quarterly on a census reporting basis (i.e., reports of use 
shall include every sound recording performed in the relevant quarter), 
containing information otherwise complying with applicable regulations 
(but no less information than required by Sec.  370.4 of this chapter), 
except that, notwithstanding Sec.  370.4(d)(2)(vi), such a 
Noncommercial Educational Webcaster shall not be required to include 
ATH or actual total performances, and may in lieu thereof provide 
channel or station name and play frequency, during the first calendar 
year it reports in accordance with paragraph (g)(3) of this section. 
For the avoidance of doubt, after a Noncommercial Educational Webcaster 
has been required to report in accordance with paragraph (g)(3) of this 
section for a full calendar year, it must thereafter include ATH or 
actual total performances in its reports of use. All reports of use 
under paragraph (g)(3) of this section shall be submitted to the 
Collective no later than the 45th day after the end of each calendar 
quarter.
    (h) Distribution of royalties. (1) The Collective shall promptly 
distribute royalties received from Noncommercial Educational Webcasters 
to Copyright Owners and Performers, or their designated agents, that 
are entitled to such royalties. The Collective shall only be 
responsible for making distributions to those Copyright Owners, 
Performers, or their designated agents who provide the Collective with 
such information as is necessary to identify and pay the correct 
recipient. The Collective shall distribute royalties on a basis that 
values all performances by a Noncommercial Educational Webcaster 
equally based upon the information provided under the report of use 
requirements for Noncommercial Educational Webcasters contained in 
Sec.  370.4 of this chapter and this subpart, except that in the case 
of Noncommercial Educational Webcasters that elect to pay a Proxy Fee 
in lieu of providing reports of use pursuant to paragraph (g)(1) of 
this section, the Collective shall distribute the aggregate royalties 
paid by electing Noncommercial Educational Webcasters based on proxy 
usage data in accordance with a methodology adopted by the Collective's 
Board of Directors.
    (2) If the Collective is unable to locate a Copyright Owner or 
Performer entitled to a distribution of royalties under paragraph 
(h)(1) of this section within 3 years from the date of payment by a 
Noncommercial Educational Webcaster, such distribution may first be 
applied to the costs directly attributable to the administration of 
that distribution. The foregoing shall apply notwithstanding the common 
law or statutes of any State.
    (i) Server logs. Noncommercial Educational Webcasters shall retain 
for a period of no less than three full calendar years server logs 
sufficient to substantiate all information relevant to eligibility, 
rate calculation and reporting under this subpart. To the extent that a 
third-party Web hosting or service

[[Page 23138]]

provider maintains equipment or software for a Noncommercial 
Educational Webcaster and/or such third party creates, maintains, or 
can reasonably create such server logs, the Noncommercial Educational 
Webcaster shall direct that such server logs be created and maintained 
by said third party for a period of no less than three full calendar 
years and/or that such server logs be provided to, and maintained by, 
the Noncommercial Educational Webcaster.
    (ii) [Reserved]


Sec.  380.24  Confidential Information.

    (a) Definition. For purposes of this subpart, ``Confidential 
Information'' shall include the statements of account and any 
information contained therein, including the amount of Usage Fees paid, 
and any information pertaining to the statements of account reasonably 
designated as confidential by the Noncommercial Educational Webcaster 
submitting the statement.
    (b) Exclusion. Confidential Information shall not include documents 
or information that at the time of delivery to the Collective are 
public knowledge. The party claiming the benefit of this provision 
shall have the burden of proving that the disclosed information was 
public knowledge.
    (c) Use of Confidential Information. In no event shall the 
Collective use any Confidential Information for any purpose other than 
royalty collection and distribution and activities related directly 
thereto.
    (d) Disclosure of Confidential Information. Access to Confidential 
Information shall be limited to:
    (1) Those employees, agents, attorneys, consultants and independent 
contractors of the Collective, subject to an appropriate 
confidentiality agreement, who are engaged in the collection and 
distribution of royalty payments hereunder and activities related 
thereto, for the purpose of performing such duties during the ordinary 
course of their work and who require access to Confidential 
Information;
    (2) An independent Qualified Auditor, subject to an appropriate 
confidentiality agreement, who is authorized to act on behalf of the 
Collective with respect to verification of a Noncommercial Educational 
Webcaster's statement of account pursuant to Sec.  380.25 or on behalf 
of a Copyright Owner or Performer with respect to the verification of 
royalty distributions pursuant to Sec.  380.26;
    (3) Copyright Owners and Performers, including their designated 
agents, whose works have been used under the statutory licenses set 
forth in 17 U.S.C. 112(e) and 114(f) by the Noncommercial Educational 
Webcaster whose Confidential Information is being supplied, subject to 
an appropriate confidentiality agreement, and including those 
employees, agents, attorneys, consultants and independent contractors 
of such Copyright Owners and Performers and their designated agents, 
subject to an appropriate confidentiality agreement, for the purpose of 
performing their duties during the ordinary course of their work and 
who require access to the Confidential Information; and
    (4) In connection with future proceedings under 17 U.S.C. 112(e) 
and 114(f) before the Copyright Royalty Judges, and under an 
appropriate protective order, attorneys, consultants and other 
authorized agents of the parties to the proceedings or the courts.
    (e) Safeguarding of Confidential Information. The Collective and 
any person identified in paragraph (d) of this section shall implement 
procedures to safeguard against unauthorized access to or dissemination 
of any Confidential Information using a reasonable standard of care, 
but no less than the same degree of security used to protect 
Confidential Information or similarly sensitive information belonging 
to the Collective or person.


Sec.  380.25  Verification of royalty payments.

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


Sec.  380.26  Verification of royalty distributions.

    (a) General. This section prescribes procedures by which any 
Copyright Owner or Performer may verify the royalty distributions made 
by the Collective; provided, however, that nothing contained in this 
section shall apply to situations where a Copyright Owner or Performer 
and the Collective have agreed as to proper verification methods.
    (b) Frequency of verification. A Copyright Owner or Performer may 
conduct a single audit of the Collective upon reasonable notice and 
during reasonable business hours, during any given calendar year, for 
any or all of the prior 3 calendar years, but no calendar year shall be 
subject to audit more than once.
    (c) Notice of intent to audit. A Copyright Owner or Performer must 
file with the Copyright Royalty Board a

[[Page 23139]]

notice of intent to audit the Collective, which shall, within 30 days 
of the filing of the notice, publish in the Federal Register a notice 
announcing such filing. The notification of intent to audit shall be 
served at the same time on the Collective. Any audit shall be conducted 
by an independent Qualified Auditor identified in the notice, and shall 
be binding on all Copyright Owners and Performers.
    (d) Acquisition and retention of report. The Collective shall use 
commercially reasonable efforts to obtain or to provide access to any 
relevant books and records maintained by third parties for the purpose 
of the audit. The Copyright Owner or Performer requesting the 
verification procedure shall retain the report of the verification for 
a period of not less than 3 years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent Qualified Auditor, shall serve as an acceptable 
verification procedure for all parties with respect to the information 
that is within the scope of the audit.
    (f) Consultation. Before rendering a written report to a Copyright 
Owner or Performer, except where the auditor has a reasonable basis to 
suspect fraud and disclosure would, in the reasonable opinion of the 
auditor, prejudice the investigation of such suspected fraud, the 
auditor shall review the tentative written findings of the audit with 
the appropriate agent or employee of the Collective in order to remedy 
any factual errors and clarify any issues relating to the audit; 
Provided that the appropriate agent or employee of the Collective 
reasonably cooperates with the auditor to remedy promptly any factual 
errors or clarify any issues raised by the audit.
    (g) Costs of the verification procedure. The Copyright Owner or 
Performer requesting the verification procedure shall pay the cost of 
the procedure, unless it is finally determined that there was an 
underpayment of 10% or more, in which case the Collective shall, in 
addition to paying the amount of any underpayment, bear the reasonable 
costs of the verification procedure.


Sec.  380.27  Unclaimed funds.

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

    Dated: February 12, 2014.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.

    Approved By:

James H. Billington,
Librarian of Congress.
[FR Doc. 2014-08664 Filed 4-24-14; 8:45 am]
BILLING CODE P