[Federal Register: January 24, 2008 (Volume 73, Number 16)] [Rules and Regulations] [Page 4080-4104] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr24ja08-20] ======================================================================= ----------------------------------------------------------------------- LIBRARY OF CONGRESS Copyright Royalty Board 37 CFR Part 382 [Docket No. 2006-1 CRB DSTRA] Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services AGENCY: Copyright Royalty Board, Library of Congress. ACTION: Final rule and order. ----------------------------------------------------------------------- SUMMARY: The Copyright Royalty Judges are announcing their final determination of the rates and terms for the digital transmission of sound recordings and the reproduction of ephemeral recordings by preexisting satellite digital audio radio services for the period beginning on January 1, 2007, and ending on December 31, 2012. DATES: Effective Date: January 24, 2008. Applicability Date: The regulations apply to the license period January 1, 2007, through December 31, 2012. ADDRESSES: The final determination also is posted on the Copyright Royalty Board Web site at http://www.loc.gov/crb/proceedings/2006-1/sdars-final-rates-terms.pdf . FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658. Telefax: (202) 252-3423. SUPPLEMENTARY INFORMATION: I. Introduction This is a rate determination proceeding convened under 17 U.S.C. 803(b) and 37 CFR part 351. A Notice announcing commencement of proceeding with request for Petitions to Participate in such proceeding to determine the rates and terms of royalty payments under Sections 114 and 112 of the Copyright Act for the activities of preexisting subscription services (``PSS'') and preexisting satellite digital audio radio services (``SDARS'') was published in the Federal Register on January 9, 2006.\1\ The rates and terms set in this proceeding apply to the period of January 1, 2008, through December 31, 2012 for PSS, and January 1, 2007, through December 31, 2012 for SDARS. 17 U.S.C. 804(b)(3)(B). The PSS royalty rates are provided in a separate order. For the SDARS, the instant order provides for a beginning rate of 6% of gross revenues, with increases during the term of the period. See infra at Section IV.C.3.d. --------------------------------------------------------------------------- \1\ 71 FR 1455, Docket No. 2006-1 CRB DSTRA. --------------------------------------------------------------------------- II. The Proceeding The following entities filed Petitions in response to the January 9, 2006 request for Petitions to Participate: SoundExchange, Music Choice, Muzak LLC, XM, Sirius, Royalty Logic, Inc. (``RLI''), and THP Capstar Acquisition d/b/a DMX Music (``DMX''). The Copyright Royalty Judges (``Judges'') dismissed Muzak as a party on January 10, 2007.\2\ On August 21, 2006, the Judges referred a novel material question of substantive law regarding the universe of preexisting subscription services under 17 U.S.C. 114(j)(11) \3\ to the Register of Copyrights.\4\ On October 20, 2006, the Register transmitted a Memorandum Opinion to the Board that addressed the novel question of law.\5\ The Register concluded that --------------------------------------------------------------------------- \2\ Order Granting SoundExchange's Motion to Dismiss Muzak LLC, Docket No. 2006-1 CRB DSTRA. \3\ Section 114(j)(11) of the Copyright Act defines the term ``preexisting subscription service'' to mean ``a service that performs sound recordings by means of noninteractive audio-only subscription digital audio transmissions, which was in existence and was making such transmissions to the public for a fee on or before July 31, 1998, and may include a limited number of sample channels representative of the subscription service that are made available on a nonsubscription basis in order to promote the subscription service.'' 17 U.S.C. 114(j)(11). \4\ Order Granting in Part SoundExchange's Motion Requesting Referral of a Novel Question of Substantive Law and Denying Motion by THP Capstar Acquisition Corp. D/B/A DMX Music Requesting Proposed Briefing Schedule, Docket No. 2006-1 CRB DSTRA. In its motion SoundExchange contended that Sirius and DMX are not eligible for a statutory license for a ``preexisting subscription service'' because they are not the entities that were in existence and making digital audio transmissions on or before July 31, 1998, a requirement under Section 114 of the Copyright Act. See 71 FR at 64640. \5\ The Register's Memorandum Opinion was published in the Federal Register on November 3, 2006. 71 FR 64639. for purposes of participating in a rate setting proceeding, the term ``preexisting subscription service'' is best interpreted as meaning the business entity which operates under the statutory license. A determination of whether DMX is the same service that was identified by the legislative history in 1998 and has operated continuously since that time requires a factual analysis that is beyond the scope of the Register's authority for questions presented --------------------------------------------------------------------------- under 17 U.S.C. 802(f)(1)(B). [[Page 4081]] 71 FR 64640. Subsequently, Sirius presented its case solely as an SDARS and not as a PSS in the instant proceeding. DMX withdrew from participation in the proceeding on October 30, 2006.\6\ Following an unsuccessful negotiation period, the then-remaining parties filed written direct statements on October 30, 2006 (SoundExchange, Music Choice, Sirius, and XM) and on November 21, 2006 (RLI), respectively. RLI withdrew from the proceeding on March 16, 2007.\7\ Music Choice and SoundExchange settled on June 12, 2007.\8\ The Judges published the settlement for public comment in the Federal Register on October 31, 2007 (72 FR 61585) and published a Final Rule relating to PSS on December 19, 2007 (72 FR 71795). --------------------------------------------------------------------------- \6\ Notice by DMX, Inc. of its Withdrawal from Participation in the 2006 Copyright Royalty Board Proceeding Entitled ``Adjustment of Rates and Terms for Preexisting Subscription and Satellite Digital Audio Radio Services,'' Docket No. 2006-1 CRB DSTRA. \7\ Notice by Royalty Logic, Inc. of Its Withdrawal from Participation in the 2006 Copyright Royalty Board Proceeding Entitled ``Adjustment of Rates and Terms for Preexisting Subscription and Satellite Digital Audio Radio Services,'' Docket No. 2006-1 CRB DSTRA. \8\ Notice of Settlement, Docket No. 2006-1 CRB DSTRA (June 12, 2007). --------------------------------------------------------------------------- Discovery was followed by live testimony. Testimony was taken from June 4, 2007, to July 9, 2007. XM presented testimony of the following witnesses: Mr. Gary Parsons, Chairman of the Board, XM; Mr. Eric Logan, Executive Vice President of Programming, XM; Mr. Mark Vendetti, Senior Vice President of Corporate Finance, XM; Mr. Stephen Cook, Executive Vice President for Automotive, XM; and Mr. Anthony Masiello, Senior Vice President of Operations, XM. Sirius presented testimony from the following witnesses: Mr. Mel Karmazin, President and CEO, Sirius; Mr. Terrence Smith, Senior Vice President of Engineering, Sirius; Mr. Douglas Wilsterman, Senior Vice President and General Manager of the Automotive OEM Division, Sirius; Mr. Jeremy Coleman, Vice President and General Manager of Talk Entertainment and Information Programming, Sirius; Mr. Steven Cohen, Vice President of Sports Programming, Sirius; Mr. Steven Blatter, Senior Vice President of Music Programming, Sirius; Ms. Christine Heye, former Vice President, Research, Sirius; Mr. Michael Moore, Vice President, Customer Care and Sales Operations, Sirius; Mr. David J. Frear, Chief Financial Officer, Sirius; and Mr. Robert Law, Senior Vice President and General Manager of the Consumer Electronics Division, Sirius. XM and Sirius jointly presented testimony from the following witnesses: Dr. John R. Woodbury, Vice President, CRA International and Mr. J. Armand Musey, President and Partner, New Earth, LLC. SoundExchange presented testimony of the following witnesses: Dr. Yoram (Jerry) Wind, Professor of Marketing and a Lauder Professor, The Wharton School, University of Pennsylvania; Mr. Mark Eisenberg, Executive Vice President, Business and Legal Affairs, Global Digital Business Group, Sony BMG Music Entertainment; Ms. Barrie Kessler, Chief Operating Officer, SoundExchange, Inc.; Mr. Sean Butson, Chartered Financial Analyst and consultant; Mr. Edgar Bronfman, Jr., Chairman and CEO, Warner Music Group; Mr. Simon Renshaw, President, Strategic Artist Management; Dr. Janusz Ordover, Professor of Economics, New York University; Mr. Dan Navarro, singer, songwriter, recording artist; Mr. Edward Chemelewski, President, Blind Pig Records; Mr. Michael Kushner, Senior Vice President, Business and Legal Affairs, Atlantic Records; Mr. Lawrence Kenswil, President of Universal eLabs, a division of Vivendi Universal's Universal Music Group; Mr. Charles Ciongoli, Executive Vice President and Chief Financial Officer, Universal Music Group North America; Dr. Michael Pelcovits, Principal, Microeconomic Consulting & Research Associates, Inc. The remaining parties filed written rebuttal statements on July 24, 2007. The rebuttal phase of the trial occurred from August 15, 2007 to August 30, 2007. XM presented the rebuttal testimony of Mr. Vendetti. Sirius presented the rebuttal testimony of Mr. Karmazin and Mr. Frear. Sirius and XM presented the joint rebuttal testimony of Dr. Roger G. Noll, Professor Emeritus of Economics, Stanford University; Dr. Erich Joachimsthaler, CEO, Vivaldi Partners; Dr. George Benston, John H. Harlan Professor of Finance, Accounting and Economics at the Goizueta Business School and Professor of Economics, Emory University; Mr. Daryl Martin, Vice President, Consor Intellectual Assessment Management; Dr. John Hauser, Management Science Area Head and Kirin Professor of Marketing, Massachusetts Institute of Technology; Mr. Bruce Silverman, marketing consultant; and Dr. Woodbury.\9\ --------------------------------------------------------------------------- \9\ The Services also sought to present the testimony of Professor William W. Fisher, III, but the Judges granted SoundExchange's motion to strike Professor Fisher's rebuttal testimony. 8/15/07 Tr. at 11. --------------------------------------------------------------------------- SoundExchange presented the rebuttal testimony of Mr. Ciongoli; Dr. Ordover; Mr. Bruce Elbert, President, Application Technology Strategy, Inc.; Mr. Butson; Dr. Pelcovits; Mr. Eisenberg; Ms. Kessler; Dr. Wind; Dr. Steven Herscovici, Managing Principal, Analyst Group, Inc.; and Mr. George Mantis, President, The Mantis Group, Inc. At the close of the evidence, the record was closed. In addition to the written direct statements and written rebuttal statements, the Judges heard 26 days of testimony, which filled over 7,700 pages of transcript, and over 230 exhibits were admitted. The docket contains over 400 pleadings, motions, and orders. On October 1, 2007, after the evidentiary phase of the proceeding, the participants filed Proposed Findings of Fact and Conclusions of Law. Participants filed replies on October 11, 2007. Closing arguments occurred on October 17, 2007. On December 3, 2007, the Copyright Royalty Judges issued the Initial Determination of Rates and Terms. Pursuant to 17 U.S.C. 803(c)(2) and 37 CFR part 353, SoundExchange filed a Motion for Rehearing. The Judges requested the SDARS to respond to the motion, which they did in a timely fashion. Having reviewed SoundExchange's motion and the SDARS' response, the Judges denied the motion for rehearing. Order Denying Motion for Rehearing, In the Matter of Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, Docket No. 2006-1 CRB DSTRA (January 8, 2008). As reviewed in said Order, none of the grounds in the motion presented the type of exceptional case where the Initial Determination is not supported by the evidence. 17 U.S.C. 803(c)(2)(A); 37 CFR 353.1 and 353.2. The motion did not meet the required standards set by statute, by regulation and by case law. Nevertheless, the Judges were persuaded to clarify one aspect of the definition of Gross Revenues. Specifically, the Judges are adding the phrase ``offered for a separate charge'' to the regulatory language of subsection (3)(vi)(A) of the definition of Gross Revenues at Sec. 382.11 to make clear that this portion of the definition dealing with data services does not contemplate an exclusion of revenues from such data services, where such data services are not offered for a separate charge from the basic subscription product's revenues. [[Page 4082]] III. The Statutory Standards for Determining Royalty Rates Section 801(b)(1) of the Copyright Act, 17 U.S.C., provides that the Copyright Royalty Judges shall ``make determinations and adjustments of reasonable terms and rates of royalty payments'' for the statutory licenses set forth in Sections 112(e) and 114.\10\ The section then prescribes that the royalty rates applicable under Section 114(f)(1)(B), which is the performance license for sound recordings at issue in this proceeding, shall be calculated to achieve the following objectives: \11\ --------------------------------------------------------------------------- \10\ The ``reasonable'' rates and terms requirement also applies to the statutory licenses set forth in 17 U.S.C. 115, 116, 118, 119, and 1004. Though the Section 119 license is referenced, there is currently no rate adjustment provided in the Copyright Act for that license. \11\ We note that the Section 801(b)(1) objectives, or factors, do not apply to the Section 112(e) license. For a discussion of this license's applicability to this proceeding, see infra at Section IV.D. (A) To maximize the availability of creative works to the public. (B) To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions. (C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication. (D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices. 17 U.S.C. 801(b)(1). Because of the importance of this language to our determination, the Copyright Royalty Judges undertake the following comprehensive review of the provisions and their interpretation. A. Legislative Background The Section 801(b)(1) factors owe their origin to the legislative process that produced the Copyright Act of 1976. The 1976 Act created three new statutory licenses \12\--cable, jukebox and noncommercial broadcasting--and established the Copyright Royalty Tribunal to adjust rates and terms and make royalty distributions to copyright owners where appropriate. An examination of the legislative history of the 1976 Act reveals that the motivation for adopting the Section 801(b)(1) factors arose from an exchange between Professor Ernest Gellhorn, on behalf of certain copyright users, and Professor Louis H. Pollack, on behalf of certain copyright owners, concerning the constitutionality of the Copyright Royalty Tribunal. Professor Gellhorn recommended that in order to bolster the constitutionality of the Tribunal, the Congress should, inter alia, adopt statutory standards beyond the vague criterion of ``reasonableness.'' Hearings on H.R. 2223 before the Subcomm. on Courts, Civil Liberties, and the Administration of Justice of the House Comm. on the Judiciary, 94th Cong., 1922 (1975). The Register of Copyrights, in her second supplementary report on the general revision of the copyright laws later that year, disputed the constitutional concerns of Professor Gellhorn but concluded that it would be ``wise to establish, in the statute, certain criteria beyond `reasonableness' that each Panel is to apply to its decision-making.'' Second Supplementary Report of the Register of Copyrights on the General Revision of the U.S. Copyright Law, Chapter XV, p. 31 (1975). The House Judiciary Committee, in its subsequent report on the Senate revision bill, took heed of the Register's advice and stated in the report (but not the bill), that ``it is anticipated that the Commission \13\ will consider the following objectives in determining a reasonable rate * * * '': --------------------------------------------------------------------------- \12\ The lone statutory license under the 1909 Copyright Act, the section 115 ``mechanical'' license for the making and distribution of phonorecords, was carried forward into the 1976 Act. \13\ The House revision bill created a Copyright Royalty Commission, whereas the Senate revision bill created a Copyright Royalty Tribunal. The Senate nomenclature was used in the final bill. (1) The rate should maximize the availability of diverse creative works to the public. (2) The rate should afford the copyright owner a fair income, or if the owner is not a person, a fair profit, under existing economic conditions, in order to encourage creative activity. (3) The rate should not jeopardize the ability of the copyright user (a) To earn a fair income, or if the user is not a person, a fair profit, under existing economic conditions, and (b) To charge the consumer a reasonable price for the product. (4) The rate should reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication. (5) The rate should minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices. H.R. Rep. No. 94-1476, at 173-174 (1976) (footnote added). The House and Senate Conference yielded the revision bill as enacted and set forth the Section 801(b)(1) factors in their current form. Unfortunately, the Conference Report does not offer any discussion of the final language. B. Prior Proceedings There have been three statutory license proceedings involving the reasonable rate standard and the Section 801(b)(1) factors: A Section 116 jukebox rate adjustment by the Copyright Royalty Tribunal; a Section 115 mechanical rate adjustment, also by the Tribunal; and a proceeding under the Copyright Arbitration Royalty Panel (``CARP'') system administered by the Librarian of Congress for preexisting subscription services under the same Section 114(f)(1)(B) statutory license involved in this proceeding. All three of these decisions were the subject of judicial review. 1. The 1980 Jukebox License Proceeding The Copyright Royalty Tribunal's first consideration of the reasonable rate standard and the Section 801(b)(1) factors involved the 1980 Adjustment of the Royalty Rate for Coin-Operated Phonorecord Players, better known as jukeboxes. 46 FR 884 (January 5, 1981). The Tribunal raised the $8 a year per jukebox fee that was set by statute in the 1976 Copyright Act to $50 per year phased in over a 2-year period. The rate remained in effect for a 10-year period from 1980 to 1990. While the Tribunal's decision was somewhat lengthy, its consideration and application of the standard and the Section 801(b)(1) factors was not. Coming in the last section of its decision and amounting to less than a page, the Tribunal applied the factors to the $50 rate it derived from its consideration of ``marketplace analogies'' and determined that the selected rate was consistent with each. 46 FR 889. In reviewing the Tribunal's decision, the U.S. Court of Appeals for the Seventh Circuit gave no attention to the Section 801(b)(1) factors or the Tribunal's application of them, focusing instead on the appropriateness of the Tribunal's choice of ``marketplace analogies.'' Amusement & Music Operators Ass'n. v. Copyright Royalty Tribunal, 676 F.2d 1144 (7th Cir. 1982). The Tribunal decision was upheld. 2. The 1981 Mechanical License Proceeding Less than one month after releasing the jukebox rate determination, the Tribunal issued its decision in the Adjustment of the Royalty Payable Under Compulsory License for Making [[Page 4083]] and Distributing Phonorecords, better known as the mechanical license proceeding. 46 FR 10466 (February 3, 1981). The mechanical license requires payment to copyright owners of musical works (songwriters and music publishers) for the creation and distribution of phonorecords of their works. In a lengthy decision, the Tribunal nearly doubled the existing rates and established a complex system for future interim adjustments during the 7-year license period to reflect increases in the average list price of record albums. Unlike the jukebox proceeding, the Tribunal offered its views as to the `reasonable' royalty standard and the Section 801(b)(1) factors. As to the `reasonable' royalty standard, the Tribunal stated that ``[i]t is our opinion that the term reasonable in the statute is of dominating importance in reaching a final determination in this proceeding.'' 46 FR 10479. As to the meaning of the term ``reasonable,'' the Tribunal recalled Professor Gellhorn's and the Register of Copyrights' admonitions to the Congress to adopt standards in the 1976 Copyright Act and observed that ``Congress drafted the (Section 801(b)(1)) criteria in the broadest terms that it could, consistent with its intent to prevent a challenge to the constitutionality of the Tribunal.'' Id. (parenthetical added). The Tribunal went on and ``conclude[d], consistent with its Congressional mandate, that this Tribunal's adjustment must set a ``reasonable'' mechanical royalty rate designed to achieve four objectives, set forth in Section 801 of the Act* * *'' Id. The Tribunal then undertook an application of the record evidence to each of the Section 801(b)(1) factors and concluded that the 4 cent rate it had derived from the evidence and economic testimony of the parties satisfied all of the factors. Id. at 10479-81. The U.S. Court of Appeals for the District of Columbia Circuit upheld the Tribunal's determination of the rates, but set aside the Tribunal's mechanism for adjusting the rates within the licensing period as being beyond the Tribunal's statutory authority. Recording Industry Ass'n. of America v. Copyright Royalty Tribunal, 662 F.2d 1 (D.C. Cir. 1981). In reviewing the rates, the Court discussed the Section 801(b)(1) factors not in the context of the Tribunal's interpretation or application of them, but rather in terms of the judicial standard of review to be applied. The Court concluded at least three aspects of the factors increased the deference owed to the Tribunal's conclusions. First, subsections (A) and (D)--the maximization of the availability of creative works to the public and minimization of disruption to the industries--``require determinations `of a judgmental or predictive nature,' and the court must be aware that `a forecast of the direction in which the future public interest lies necessarily involves deductions based on the expert knowledge of the agency.' '' Id. at 8 (citations omitted). Second, the Court noted that subsections (B) and (C)--the fair return and income to owners and users and relative roles of owners and users in the product--call for policy choices that should be owed considerable deference. Id. at 8-9. Finally, the Court observed: [T]he statutory factors pull in opposing directions, and reconciliation of these objectives is committed to the Tribunal as part of its mandate to determine ``reasonable'' royalty rates. Both the House and Senate had originally passed bills whose only instruction to the Tribunal was to assure that the royalty rate was reasonable, although the House report had stated objectives that it ``anticipated that the Commission will consider.'' As part of the compromise that produced the final structure of the Tribunal, most of those objectives were written into the statute,* * *, but the Tribunal was not told which factors should receive higher priorities. To the extent that the statutory objectives determine a range of reasonable royalty rates that would serve all these objectives adequately but to differing degrees, the Tribunal is free to choose among those rates, and courts are without authority to set aside the particular rate chosen by the Tribunal if it lies within a ``zone of reasonableness.'' Id. at 9 (footnotes omitted). 3. The Digital Performance Right in Sound Recordings Proceeding The Tribunal never had occasion again to conduct a Section 801(b)(1) rate adjustment, and it was abolished in 1993 and replaced by the CARP scheme administered by the Librarian of Congress. Copyright Royalty Tribunal Reform Act of 1993, Pub. L. No. 103-198, 107 Stat. 2304. Subsequent to the Tribunal's abolition, Congress passed the Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39, 109 Stat. 336, which created the Section 114 digital performance right license that is the subject of this proceeding. Unlike prior statutory licenses where the Congress fixed the initial rates within the statute, the rates for the new digital performance right license were left to resolution by a CARP. The Librarian convened a CARP in 1997 for PSS and SDARS. The SDARS settled with copyright owners and withdrew from the proceeding,\14\ and the CARP rendered a determination only with respect to the PSS. The Librarian reviewed the CARP's determination and rejected it with respect to the rate as well as to certain terms, and the U.S. Court of Appeals for the District of Columbia Circuit reviewed the Librarian's decision. The Court upheld the Librarian's rate determination but remanded certain terms adopted by the Librarian for lack of supporting evidence. Recording Industry Ass'n of America, Inc. v. Librarian of Congress, 176 F.3d 528, 532 (DC Cir. 1999). --------------------------------------------------------------------------- \14\ The terms and conditions of the agreement were never publicly disclosed. --------------------------------------------------------------------------- While the CARP offered nothing by way of interpretation of the Section 801(b)(1) factors, it took a decidedly different approach from the Tribunal in applying them. Whereas the Tribunal first analyzed the economic benchmarks submitted by the parties, selected a royalty fee and then applied the factors sequentially to the record evidence to determine if the selected fee satisfied them, the CARP instead began its analysis with the factors. The CARP did not analyze the factors in order, instead beginning with subsection (C), followed by subsections (D), (A) and then (B). Curiously, the CARP's consideration of the parties' benchmarks occurred under its consideration of subsection (B), the factor requiring a balancing of fair return to the copyright owner and fair income to the copyright user. Then, at the end of the determination, the CARP provided a less than one-page conclusion resolving all of the factors in favor of the PSS. In re: Determination of Statutory License Terms and Rates for Certain Digital Subscription Transmissions of Sound Recordings, Report of the Copyright Arbitration Royalty Panel, Docket No. 96-5 CARP DSTRA, p. 62 (November 28, 1997). The CARP's approach did not particularly vex the Librarian, but its terse conclusion that subsection (A)--maximization of creative works to the public--favored the PSS certainly did. There is no record evidence to support a conclusion that the existence of the digital transmission services stimulates the creative process. Instead, the Panel made observations concerning the development of another method for disseminating creative works to the public--a valid and vital consideration addressed in the statutory objective concerning the relative contributions from each party--but fails to discuss how the creation of a new mode of distribution will itself stimulate the creation of additional works. [[Page 4084]] Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings (Final Rule and Order), 63 FR 25394, 25406 (May 8, 1998) (codified at 37 CFR part 260) (``1998 PSS Rate Determination''). The Librarian also faulted the CARP for failing to reconcile its conclusion with the Tribunal's determination in the 1980 jukebox rate adjustment proceeding that jukeboxes did not contribute to the maximization of creative works to the public. Id. at 25406-7. As to the other Section 801(b)(1) factors, the Librarian affirmed the CARP's determination, but he concluded that an upward adjustment of the rate was necessary because he found that the CARP's reliance upon a single private license agreement offered as a benchmark and its subsequent manipulation of the license fee amounted to arbitrary action. Id. at 25409. The Librarian increased the 5% of annual revenues fee proposed by the CARP to 6.5%, stating that the 6.5% rate met all of the Section 801(b)(1) factors. Id. at 25410. Only the Recording Industry Association of America, Inc. (``RIAA'') challenged the Librarian's decision. In its petition for review, RIAA argued that the Librarian misinterpreted Section 801(b)(1) by equating ``reasonable'' royalty rates with those that are calculated to achieve the objectives of the Section 801(b)(1) factors. Rather, in RIAA's view, the statutory language imposes two separate requirements: the royalty fee must be (1) a ``reasonable copyright royalty rate,'' and (2) it must be then ``calculated to achieve'' the Section 801(b)(1) objectives. RIAA argued that a ``reasonable copyright royalty rate'' was one that affords fair market compensation, thus making market rates the starting point for application of the Section 801(b)(1) factors. Recording Industry Ass'n of America, Inc. v. Librarian of Congress, 176 F.3d 528, 532 (DC Cir. 1999). The U.S. Court of Appeals for the District of Columbia Circuit rejected RIAA's position, ruling that the Librarian's interpretation of the statute was permissible under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). 176 F.3d at 533. The Court went further and observed: ``Here, the Librarian determined that `reasonable rates' are those that are calculated with reference to the four statutory criteria. This interpretation is not only permissible but, given that [Section] 114 rates are to be `calculated to achieve' the four objectives of [Section] 801(b)(1), it is the most natural reading of the statute.'' Id.; see also, 176 F.3d at 534 (``Because it was reasonable for the Librarian to find that the term `reasonable copyright royalty rates' is defined by the four statutory objectives, there is no need to look to Tribunal precedent interpreting the term `reasonable rates' in other contexts.''). The Court did not discuss the Librarian's application of the Section 801(b)(1) factors to the record evidence, but ``den[ied] RIAA's petition for review with respect to the establishment of a 6.5 percent rate. Id. at 535.\15\ --------------------------------------------------------------------------- \15\ The RIAA was successful in convincing the Court to vacate and remand the Librarian's determination with respect to terms on the grounds of lack of record evidence to support them. Id. at 536. --------------------------------------------------------------------------- C. Approach of the Copyright Royalty Judges Based upon the above discussion, the path for the Copyright Royalty Judges is well laid out. We shall adopt reasonable royalty rates that satisfy all of the objectives set forth in Section 801(b)(1)(A)-(D). In so doing, we begin with a consideration and analysis of the benchmarks and testimony submitted by the parties, and then measure the rate or rates yielded by that process against the statutory objectives to reach our decision. Section 114(f)(1)(B) also affords us the discretion to consider the relevance and probative value of any agreements for comparable types of digital audio transmission services that submit voluntary agreements under 17 U.S.C. 114(f)(1)(A). See, 17 U.S.C. 114(f)(1)(B) (``[I]n addition to the objectives set forth in Section 801(b)(1), the Copyright Royalty Judges may consider the rates and terms for comparable types of subscription digital audio transmission services and comparable circumstances under voluntary license agreements described in subparagraph (A).'') (emphasis added). IV. Determination of Royalty Rates A. Application of Section 114 and Section 112 Based on the applicable law and relevant evidence received in this proceeding, the Copyright Royalty Judges must determine rates for the Section 114 performance licenses and the associated Section 112 ephemeral reproduction licenses utilized by SDARS. As previously discussed, the Copyright Act requires that the Copyright Royalty Judges establish rates for the Section 114 license that are reasonable and calculated to achieve the following four specific policy objectives: (A) To maximize the availability of creative works to the public; (B) to afford the copyright owner a fair return for his creative work and the copyright user a fair income under existing economic conditions; (C) to reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication; and (D) to minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices. 17 U.S.C. 114(f)(1)(B) and 17 U.S.C. 801(b)(1). With respect to the Section 112 license, the Copyright Act requires that the Copyright Royalty Judges establish rates for this license that most clearly represent those ``that would have been negotiated in the marketplace between a willing buyer and a willing seller'' and to take into account evidence presented on such factors as (1) whether the use of the services may substitute for or promote the sale of phonorecords and (2) whether the copyright owner or the service provider makes relatively larger contributions to the service ultimately provided to the consuming public with respect to creativity, technology, capital investment, cost and risk. 17 U.S.C. 112(e)(4). Having carefully considered the relevant law and the evidence received in this proceeding, the Copyright Royalty Judges determine that the appropriate Section 114 performance license rate is 6.0% of gross revenues for 2007 and 2008, 6.5% for 2009, 7.0% for 2010, 7.5% for 2011 and 8.0% for 2012 and, further, that the appropriate Section 112 reproduction license rate is deemed to be embodied in the Section 114 license rate. The applicable rate structure for the Section 114 license is the starting point for the Copyright Royalty Judges' determination. B. The Rate Proposals of the Parties and the Appropriate Royalty Structure for Section 114 Performance License Applicable To Sdars 1. Rate Proposals The contending parties present several alternative rate structures. In its second amended rate proposal, SoundExchange argues in favor of a monthly fee equal to the greater of: A percentage of gross revenues varying from 8% to 23% or a per subscriber rate varying from $0.85 per subscriber to $3.00 per subscriber. These applicable fees vary based on the actual number of [[Page 4085]] subscriptions reported by the service. For example, the lowest fee (i.e., the greater of 8% of gross revenues or $0.85 per subscriber) would be applicable for a number of subscriptions equal to less than 9 million. At the opposite extreme, the highest fee (i.e., the greater of 23% of gross revenues or $3.00 per subscriber) would be applicable for a number of subscriptions equal to or more than 19 million. While proposing that the percent of revenues alternatives increase only in response to subscriber growth over the license period, SoundExchange proposes that the per subscriber alternatives associated with particular subscriber numbers would be additionally adjusted at the beginning of each year starting with January, 2008 by the change in the consumer price index (CPI-U) over the preceding 12 months ending on November 1. SoundExchange Second Amended Rate Proposal (July 24, 2007) at 1-4. Subsequently, SoundExchange defensively offered, in the alternative, a second ``option'' in which applicable rates would continue to vary with subscriber numbers but also would vary at each subscriber interval based on a per broadcast/per subscriber metric. For example, at the low end of this alternative proposal, if the number of subscriptions were equal to less than 9 million for an SDARS, $0.0000028 per subscriber would be applicable to each broadcast of a sound recording for the first 150,000 sound recordings broadcast each month and $0.0000008 per subscriber would be applicable to each broadcast of a sound recording thereafter. At the high end of this alternative, if the number of subscriptions were equal to more than 19 million for an SDARS, $0.00001 per subscriber would be applicable to each broadcast of a sound recording for the first 150,000 sound recordings broadcast each month and $0.000003 per subscriber would be applicable to each broadcast of a sound recording thereafter. With respect to this ``option,'' SoundExchange also proposes that the royalty rates associated with particular subscriber numbers would be additionally adjusted at the beginning of each year starting with January, 2008 by the change in the CPI-U over the preceding 12 months ending on November 1. SoundExchange Third Amended Rate Proposal (August 6, 2007) at 1-8. By contrast, XM and Sirius initially proposed only a percentage of revenues fee structure equal to 0.88% of a licensee's quarterly gross revenues resulting from residential services in the United States to be applicable for the duration of the 2007-2012 license period. XM Rate Proposal (January 17, 2007) at Sec. 26--.3; Sirius Rate Proposal (January 17, 2007) at Sec. 26--.3. This proposal was subsequently revised in an amended proposal \16\ that called for the establishment in 2007 of a quarterly license fee of $1.20 per play \17\ of a copyrighted sound recording during the quarter, with subsequent years of the license period beginning with 2008 adjusted each year by the percentage change in combined SDARS subscribers during the preceding year. XM Amended Rate Proposal (July 24, 2007) at Sec. 3--.3; Sirius Amended Rate Proposal (July 24, 2007) at Sec. 3--.3. A further revision of this proposal was submitted as the Services' Second Amended Proposal of Rates and Terms and provided for the establishment in 2007 of a quarterly license fee of $1.60 per play of a copyrighted sound recording during the quarter, again with subsequent years of the license period beginning with 2008 adjusted each year by the percentage change in combined SDARS subscribers during the preceding year. Second Amended Proposal of Rates and Terms of Sirius Satellite Radio Inc. and XM Satellite Radio Inc. (October 1, 2007) at Sec. 3--.3. --------------------------------------------------------------------------- \16\ While the XM and Sirius amended rate proposal omits any specific mention of a revenue basis, their chief economic expert, Dr. Woodbury, nevertheless supplies a revised estimate of his recommended revenue-based rate in the course of his rebuttal testimony and uses that revised revenue-based rate as the basis for the SDARS' amended and second amended ``per play'' proposals. At bottom then, the SDARS' amended rate proposal does not scrap its revenue basis, but rather simply translates the revenue-based recommendation of 1.20% into a per play rate by dividing the revenues that would be garnered from the application of the revised revenue-based rate by the total number of estimated compensable plays broadcast by the SDARS in 2006. This results in a per play rate of $1.20 in their amended proposal based on 2006 revenues and a per play rate of $1.60 in their second amended proposal based instead on 2007 revenue projections. Woodbury WRT at 22; SDARS PFF at ]] 845-846. \17\ ``Play'' is defined as the transmission of a sound recording by the SDARS, regardless of the number of listeners who tune in or listen to the transmission. XM Amended Rate Proposal (July 24, 2007) at Sec. 3--.2(d); Sirius Amended Rate Proposal (July 24, 2007) at Sec. 3--.2(d). --------------------------------------------------------------------------- In other words, while the parties on both sides initially proposed rates based on a percentage of gross revenues (albeit with somewhat different definitions of gross revenues), they both subsequently submitted royalty payment proposals that could generally be described as ``per play'' or ``per broadcast'' rates. However, their purposes in proposing ``per play'' or ``per broadcast'' rates differ. While admitting the likelihood of increased administrative costs, the SDARS maintain that their ``per play'' mechanism is superior to a revenue- based rate structure because: (1) It allows the SDARS to respond to any substantial increases in fees by economizing on the use of music so as to reduce their payments and (2) it preserves the incentives of the SDARS to acquire more attractive nonmusic programming or to improve the quality of their radio devices. Woodbury WRT at 21. SoundExchange, on the other hand, while recognizing that there are benefits to a per performance rate structure such as adopted by the Judges in the recently concluded webcasting proceeding \18\ (i.e., where a performance refers to one play of one sound recording to a single listener at a time), also recognizes that its ``per broadcast'' alternative is not the functional equivalent of a per performance rate structure. As a result, SoundExchange admits that its ``per broadcast'' mechanism does not engender the benefits of the usage metric adopted in Webcaster II and, further, that it is inferior to a percentage of revenue structure. Pelcovits WRT at 19, 25-26. At bottom, SoundExchange's alternative proposal is submitted defensively to protect against the possibility that, notwithstanding these weaknesses, this Court might nevertheless settle upon a per play or per broadcast approach without reducing what SoundExchange identifies as ``the most significant distortion in a static proposal of this nature''--the lack of proportionality between total listening and the number of broadcasts. Pelcovits WRT at 23. For this reason, SoundExchange offers a two-tier structure associated with seven specific subscriber intervals as part of its per broadcast/per subscriber proposal to help mitigate the potential adverse revenue impact of a decline in music broadcasts that is not fully matched by an equivalent decline in music listenership. Pelcovits WRT at 23-25. --------------------------------------------------------------------------- \18\ Digital Performance Right in Sound Recordings and Ephemeral Recordings (Final Rule and Order), 72 FR 24084 (May 1, 2007) (codified at 37 CFR part 380) (``Webcaster II''). --------------------------------------------------------------------------- 2. Rate Structure Because we have no true per performance fee proposal before us nor sufficient information from evidence of record to accurately transform any of the parties' proposals into a true per performance fee proposal, the Copyright Royalty Judges conclude that a revenue-based fee structure for the SDARS is the most appropriate fee structure applicable to these licensees. First, the absence of a true per performance fee proposal that seeks to tie payment directly to actual usage of the sound recording by the licensees [[Page 4086]] makes all the various alternative fee proposals of the parties into proxies for a usage metric at best. Although revenue merely serves as a proxy for measuring the value of the rights used, so also do the per play and per broadcast alternatives offered by the parties. Neither of the parties' alternatives to a revenue-based metric really measures actual usage. The SDARS ``per play'' proposal makes no attempt to measure the number of listeners to any particular sound recording, but rather transforms the revenue-based metric into a ``per play'' metric by applying that revenue rate to the transmission of a sound recording without regard to the number of listeners who tune in or listen to the transmission. Woodbury WRT at 22 and XM Amended Rate Proposal (July 24, 2007) at Sec. 3--.2(d); Sirius Amended Rate Proposal (July 24, 2007) at Sec. 3--.2(d); Second Amended Proposal of Rates and Terms of Sirius Satellite Radio Inc. and XM Satellite Radio Inc. (October 1, 2007) at Sec. 3--.2(d). Indeed, since the number of ``plays'' (i.e. transmission of a sound recording) for which the SDARS propose payment is not further related to the number of listeners to such transmissions, Dr. Woodbury admits that the per play rate is not even as good a proxy for usage as revenue without further annual adjustments for growth in subscribers. Woodbury WRT at 22. Similarly, the SoundExchange ``per broadcast'' rate proposal fails to relate royalty payments directly to usage. Even though the SoundExchange ``per broadcast'' proposal is tied to the number of SDARS subscribers, it remains, at best, a proxy for actual usage because, as Dr. Pelcovits admits, ``subscribers'' are not the functional equivalent of ``listeners'' and because the available data does not permit the precise determination of whether the music listened to by SDARS subscribers refers solely to the compensable sound recordings at question in this proceeding. Pelcovits WRT at Appendix at 1-3. In short, as Dr. Pelcovits states, ``the per broadcast/per subscriber metric simply does not provide an accurate and dynamic measure of listening/consumption.'' Pelcovits WRT at 25. Second, the advocates of the ``per play'' and ``per broadcast'' rate structures effectively admit that, as proxies for usage, such measures are no better than revenue-based measures, as shown by their attempts to use changes in general subscriber levels as a rough proxy for measuring the impact of changes in the number of listeners. For example, Dr. Woodbury, after noting that the ``per-play payment does not account for any changes in aggregate music listening time during the license period,'' suggests ``accounting for such changes in an approximate way by increasing the per-play rate by the actual annual percentage change in the number of SDARS subscribers.'' Woodbury WRT at 22 (emphasis added). Similarly, SoundExchange's ``per broadcast/per subscriber'' rate proposal, ultimately ties increases in royalty rates to the achievement of specific subscriber levels that are only roughly related to the actual number of listeners to any given sound recording. SoundExchange Third Amended Rate Proposal (August 6, 2007) at 5-7. In short, both parties ultimately focus on a major driver of revenue growth (i.e., subscriber growth) as a proxy for usage because, without this additional adjustment, ``per play'' and ``per broadcast'' metrics are clearly poorer substitutes for a usage-based metric compared to a percentage of revenue approach. Consequently, notwithstanding the various adjustments made by advocates of the ``per play'' or ``per broadcast'' proposals they remain inextricably focused on revenues. Moreover, because the adjustments suggested to improve the ``per play'' and ``per broadcast'' proposals result in additional ambiguities rather than more precision, these alternatives may be even less satisfactory proxies for a usage-based metric than the percentage of revenue approach. Third, upon careful review, we find that the SDARS' two proffered advantages of a ``per play'' metric as compared to a percentage of revenue measure are less advantageous than claimed. The SDARS argue that a ``per play'' rate provides the SDARS with more business flexibility because it allows them to respond to any substantial increases in fees by economizing on the plays of sound recordings so as to reduce their royalty costs. Woodbury WRT at 20; Karmazin WRT at 13. While the general proposition of enhancing business flexibility is usually advantageous (at least to the party obtaining such flexibility), the probability of obtaining the specific advantage described by Dr. Woodbury and Mr. Karmazin is reduced by the myriad of economic circumstances which must coalesce as necessary preconditions.\19\ Further, the same flexibility may be achieved by other means.\20\ At the same time, this business flexibility ``advantage'' raises serious questions of fairness precisely because the SDARS ``per play'' metric is a less than fully satisfactory proxy for listenership. Thus, fewer stations (ergo fewer plays) could be offered by the SDARS without a proportionate reduction in the number of transmissions actually heard. Under such circumstances, the copyright owner's per performance revenue would decline because of the shortcomings of the ``per play'' metric in question as a proxy for measuring actual usage. SX PFF at ]] 1442-9. It is not fair to so clearly fail to properly value the performance rights at issue in this proceeding. Such a result is additionally at odds with the stated policy objective of the statute to afford the copyright owner a fair return for his creative work. 17 U.S.C. 801(b)(1). Similarly, the SDARS' contention that the adoption of a ``per play'' rate structure would preserve their incentives to improve the quality of their service (by leaving them with more revenue to acquire more attractive nonmusic programming or to improve the quality of their radio devices), is not an advantage equitably experienced by both parties. Rather, the advantage runs to the SDARS who stand to gain revenue while the copyright owner experiences a decline in the value of the performance rights at issue in this proceeding. Again, this is because number of plays can be reduced with a less than proportionate reduction in listenership. Furthermore, there is no guarantee that the SDARS will spend any additional revenue so acquired to improve the quality of their services; thus ``preserving an incentive'' is not the equivalent of insuring action of the type suggested by Dr. Woodbury based on that incentive. --------------------------------------------------------------------------- \19\ From an economic point of view, for example, it would only make sense for the SDARS to reduce their use of music as an input in response to a royalty fee increase if the revenue they earned from the last dollar spent on music programming came to be outstripped by the revenue they earned from spending the same dollar on nonmusic programming. This assumes that a variety of relative revenue generation and relative input pricing circumstances have been simultaneously satisfied. \20\ For example, in light of the definition of ``gross revenues'' herein below in this determination, the SDARS could offer wholly nonmusic programming as an additional, separately priced premium channel/service without having the revenues from such a premium channel/service become subject to the royalty rate and, thereby, achieve the desired flexibility of offering more lucrative nonmusic programming without sharing the revenues from that programming with the suppliers of sound recording inputs. --------------------------------------------------------------------------- In short, given that the two ``advantages'' of the ``per play'' approach stated by Dr. Woodbury are neither clear-cut nor of estimable likelihood, we are persuaded that the ``countervailing consideration'' of greater administrative costs raised by Dr. Woodbury clearly outweighs the [[Page 4087]] tenuous benefits of the SDARS ``per play'' fee structure. SoundExchange in its proposed ``per broadcast/per subscriber'' approach attempts to mitigate some of the untoward effects of the SDARS ``per play'' approach through the addition of a two-tier fee structure that partially and indirectly addresses the absence of a true per performance measure reflective of actual listenership. However, we agree with Dr. Pelcovits that even as so modified, this approach still yields less than satisfactory results. Pelcovits WRT at 25 (``the per broadcast/per-subscriber [sic] metric simply does not provide an accurate and dynamic measure of listening/consumption''). Moreover, the tradeoff for this modest conceptual improvement in the ``per play'' fee structure is reliance on less than precise estimates of listenership and additional complexity in administration. On balance, then, we conclude that neither the SDARS' ``per play'' metric nor SoundExchange's ``per broadcast/per subscriber'' measure is superior to a revenue-based fee structure as a proxy for a true per performance fee structure for the services in this proceeding. Furthermore, a revenue- based fee structure at least offers clear administrative advantages to these parties and, therefore, reduced transactions costs compared to the ``per play'' and ``per broadcast/per subscriber'' alternatives proposed by the parties. Fourth, while in Webcaster II we concluded that the evidence in the record of that proceeding weighed in favor of a per performance usage fee structure for both commercial and noncommercial webcasters, we further suggested that, in the absence of some of the more egregious problems noted therein, the use of a revenue-based metric as a proxy for a usage-based metric might be reasonable. Webcaster II, 72 FR 24090. In particular, one of the more intractable problems associated with the revenue-based metrics proposed by the parties in Webcaster II, 72 FR 24090, was the parties' strong disagreement concerning the definition of revenue for nonsubscription services. This was further complicated by questions related to applying the same revenue-based metric to noncommercial as well as commercial services. See Webcaster II, 72 FR 24094 n.15. The same degree of difficulty is not presented by the applicable facts in this proceeding. The parties to this proceeding, at least initially, all proposed a revenue-based metric and, while there were some differences in the definition of revenues in their initial proposals, no party has submitted any evidence regarding the impossibility of applying or complying with a revenue-based metric. That is not surprising, inasmuch as the parties have until now lived under a revenue-based regime. Therefore the parties are most familiar, and perhaps most comfortable, with the operation of a revenue-based metric. The value of such familiarity lies in its contribution towards minimizing disputes and, concomitantly, keeping transactions costs in check. Because XM and Sirius are both commercial subscription services and music is an integral part of each subscription service, focusing on gross revenues attributable to those subscriptions or derived in connection with the use of music in SDARS programming (e.g., advertising or sponsorship revenues attributable to such programming) provides a straightforward method of relating music fees to the value of the rights being provided. For all of the above reasons, the Copyright Royalty Judges conclude that evidence in the record weighs in favor of a revenue-based fee structure for the SDARS. We find a sufficient clarity of evidence based on the record in this proceeding to produce a revenue-based metric that can serve as adequate proxy for a usage-based metric. Furthermore, there was no substantial evidence offered by any party to readily guide the calculation of a usage-based (i.e. per performance) metric as a substitute for the revenue-based approach long employed by the parties. Indeed, in stark contrast to the record in Webcaster II, neither the SDARS nor SoundExchange provided substantial evidence to indicate that a true per performance rate was susceptible of being calculated by the parties to this proceeding. Therefore, we find that a revenue-based measure is currently the most effective proxy for capturing the value of the performance rights at issue here, particularly in the absence of any substantial evidence of how some readily calculable true per performance metric could be applied to the SDARS. 3. Revenue Defined In order to properly implement a revenue-based metric, a definition of revenue that properly relates the fee to the value of the rights being provided is required.\21\ Although the SDARS and SoundExchange offered somewhat different formulations of how revenue should be defined in their initial rate proposals, the parties offered little evidence to support their respective proposed definitions of revenue. SoundExchange proposed an expansive reading of revenue to include ``all revenue paid or payable to an SDARS that arise from the operation of an SDARS service * * *'' SoundExchange Third Amended Rate Proposal (August 6, 2007) at Sec. 38--.2(g). However, SoundExchange offers scant evidentiary support for this particularly broad yet vague definition. The SDARS, by contrast, offer a definition of gross revenues that apparently seeks to largely adapt the existing PSS definition of gross revenues, 37 CFR 260.2(e), to the nature of current SDARS services. XM Rate Proposal (January 17, 2007) at Sec. 26--.2(d); Sirius Rate Proposal (January 17, 2007) at Sec. 26--.2(d). With one exception, we find that the SDARS ``gross revenue'' definition in their initial fee proposal more unambiguously relates the fee to the value of the sound recording performance rights at issue in this proceeding. For example, the SDARS definition of ``gross revenues'' excludes monies attributable to premium channels of nonmusic programming that are offered for a charge separate from the general subscription charge for the service. The separate fee generated for such nonmusic premium channels is not closely related to the value of the sound recording performance rights at issue in this proceeding. Therefore, this proposed exclusion serves to more clearly delineate the revenues related to the value of the sound recording performance rights at issue in this proceeding. --------------------------------------------------------------------------- \21\ Dr. Ordover simply describes the main consideration as follows: ``In sum, rates should reflect purchasers' willingness to pay for music content.'' Ordover WDT at 21 (emphasis added). --------------------------------------------------------------------------- The one exception to the SDARS definition of revenues that fails to meet the test of unambiguously relating the fee to the value of the sound recording performance rights is the use of the SDARS definition of a Music Channel in two places in their gross revenue definition-- once in connection with a limitation on advertising revenues and again in an exclusion of subscription revenues solely derived from nonmusic channels. The SDARS define Music Channels to mean channels where sound recordings constitute 50% or more of the programming at SDARS proposed regulation Sec. 26--.2(f), but their gross revenue definition at SDARS proposed regulation Sec. 26--.2(d)(vi)(B) also implies that nonmusic channels are channels that are characterized as those with only ``incidental'' performances of sound recordings.\22\ Because the latter [[Page 4088]] interpretation is more consistent with the test of unambiguously relating the fee to the value of the sound recording performance rights at issue in this proceeding and because the SDARS offer no substantial evidence to support their 50% breakpoint, we decline to adopt the more cramped position stated in the SDARS' proposed definition of a Music Channel. Rather, we adopt the SDARS ``incidental'' performance of sound recordings formulation. Using the latter formulation, gross revenues would exclude both subscription and advertising revenues associated with channels that use only ``incidental'' performances of sound recordings as part of their programming.\23,\ \24\ --------------------------------------------------------------------------- \22\ The latter definition is more consistent with current SDARS programming. See Woodbury Amended WDT at 6-7 and Ex. 3 and Ex. 4. It is also more consistent with the notion of a music channel espoused by SDARS' expert economist, Dr. Woodbury, who identifies all channels using commercially released sound recordings as ``music channels'' in his analyses. Woodbury Amended WDT at 7 and n.22. \23\ See infra at Sec. 382.11 (definition of ``Gross Revenues''). \24\ The Judges do not address here the compensability of ``incidental'' performances of sound recordings; rather, the Judges find that reference to such ``incidental'' performances facilitates an unambiguous definition of nonmusic channels identifying substantial revenue generation unrelated to the sound recording rights at issue in this proceeding and which arises under circumstances clearly distinguishable from the joint music/nonmusic product typically offered by the SDARS. --------------------------------------------------------------------------- A further consequence of the Copyright Royalty Judges adopting the revenue-based metric as a proxy for a usage-based metric with the definition of gross revenue described hereinabove is to eliminate the need for a rate structure formulated as a ``greater of'' comparison between gross revenue-based metrics and alternative revenue-based metrics that focus on the dollar value of subscriptions alone. Although SoundExchange proposes an alternative per subscription dollar amount, the Judges do not find the basis for this alternative structure to be supported by persuasive evidence. For example, SoundExchange's expert economist, Dr. Pelcovits, simply asserts that its rate proposal ``sensibly follows a `greater of' rate structure common to certain marketplace agreements'' without more. Pelcovits WDT at 4. Indeed, Dr. Pelcovits' recommended SDARS rate itself is not stated as a ``greater of'' alternative, but rather as equivalent dollar per subscriber or percent of revenue rates. Pelcovits WDT at 32, Pelcovits WRT at 39. SoundExchange's other economic expert, Dr. Ordover, similarly reads SoundExchange's per subscriber and percent of revenue rates as equivalent alternatives. Ordover WDT at 4. Neither Dr. Pelcovits nor any other SoundExchange witness offers a solid explanation of why a ``greater of'' rate structure makes sense in other marketplaces together with an explanation of how that rationale is also applicable to this marketplace, notwithstanding any differences observed between the marketplaces in question. Nor does SoundExchange present any persuasive evidence that the availability of this per subscription alternative is necessary because it is easier to administer and thus will reduce transactions costs. Finally, given the parameters of gross revenues as defined hereinabove, there is no evidence in the record to suggest that gross revenues could be reduced below the amount of revenues otherwise due from applicable subscriptions. For all these reasons, the Judges decline to establish such a duplicative structure. C. The Section 114 Royalty Rates for the SDARS 1. The Applicable Standard As previously noted hereinabove, supra at Section IV.A., the Copyright Act requires that the Copyright Royalty Judges establish rates for the Section 114 license that are reasonable and calculated to achieve the following four specific policy objectives identified in Section 801(b): (A) To maximize the availability of creative works to the public; (B) to afford the copyright owner a fair return for his creative work and the copyright user a fair income under existing economic conditions; (C) to reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication; and (D) to minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices. 17 U.S.C. 114(f)(1)(B) and 17 U.S.C. 801(b)(1). Both the copyright owners and the SDARS agree that a good starting point for the determination of what constitutes a reasonable rate encompassing the f