Digital Performance Right in Sound Recordings and Ephemeral Recordings, 24084-24114 [E7-8128]

Agencies

[Federal Register Volume 72, Number 83 (Tuesday, May 1, 2007)]
[Rules and Regulations]
[Pages 24084-24114]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-8128]



[[Page 24083]]

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Part VI





Library of Congress





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Copyright Royalty Board



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37 CFR Part 380



 Digital Performance Right in Sound Recordings and Ephemeral 
Recordings; Final Rule

Federal Register / Vol. 72, No. 83 / Tuesday May 1, 2007 / Rules and 
Regulations

[[Page 24084]]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 380

[Docket No. 2005-1 CRB DTRA]


Digital Performance Right in Sound Recordings and Ephemeral 
Recordings

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Copyright Royalty Judges, on behalf of the Copyright 
Royalty Board of the Library of Congress, are announcing their final 
determination of the rates and terms for two statutory licenses, 
permitting certain digital performances of sound recordings and the 
making of ephemeral recordings, for the period beginning January 1, 
2006, and ending on December 31, 2010.

DATES: Effective date: May 1, 2007.
    Applicability date: The regulations apply to the license period 
January 1, 2006 through December 31, 2010.

ADDRESSES: The final determination is also posted on the Copyright 
Royalty Board Web site at http://www.loc.gov/crb/proceedings/2005-1/final-rates-terms2005-1.pdf.

FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or 
Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658. Telefax: 
(202) 252-3423.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Subject of the Proceeding

    This is a rate determination proceeding convened under 17 U.S.C. 
803(b) et seq. and 37 CFR 351 et seq., in accord with the Copyright 
Royalty Judges' Notice announcing commencement of proceeding, with a 
request for Petitions to Participate in a proceeding to determine the 
rates and terms for a digital public performance of sound recordings by 
means of an eligible nonsubscription transmission or a transmission 
made by a new subscription service under section 114 of the Copyright 
Act, as amended by the Digital Millennium Copyright Act (``DMCA''), and 
for the making of ephemeral copies in furtherance of these digital 
public performances under section 112, as created by the DMCA, 
published at 70 FR 7970 (February 16, 2005). The rates and terms set in 
this proceeding apply to the period of January 1, 2006 through December 
31, 2010. 17 U.S.C. 804(b)(3)(A).

B. Parties to the Proceeding

    The parties to this proceeding are: (i) Digital Media Association 
and certain of its member companies that participated in this 
proceeding, namely: America Online, Inc. (``AOL''), Yahoo!, Inc. 
(``Yahoo!''), Microsoft, Inc. (``Microsoft''), and Live365, Inc. 
(``Live365'') (collectively referred to as ``DiMA''); (ii) ``Radio 
Broadcasters'' (this designation was adopted by the parties): namely, 
Bonneville International Corp., Clear Channel Communications, Inc., 
National Religious Broadcasters Music License Committee (``NRBMLC''), 
Susquehanna Radio Corp.; (iii) SBR Creative Media, Inc. (``SBR'') and 
the ``Small Commercial Webcasters'' (this designation was adopted by 
the parties): namely, AccuRadio, LLC, Digitally Imported, Inc., 
Radioio.com LLC, Discombobulated, LLC, 3WK, LLC, Radio Paradise, Inc.; 
(iv) National Public Radio, Inc. (``NPR''), Corporation for Public 
Broadcasting-Qualified Stations (``CPB''), National Religious 
Broadcasters Noncommercial Music License Committee (``NRBNMLC''), 
Collegiate Broadcasters, Inc. (``CBI''), Intercollegiate Broadcasting 
System, Inc., (``IBS''), and Harvard Radio Broadcasting, Inc. 
(``WHRB''); (v) Royalty Logic, Inc. (``RLI''); and (vi) SoundExchange, 
Inc. (``SoundExchange'').
    DiMA, Radio Broadcasters, Small Commercial Webcasters, SBR, NPR, 
CPB, NRBNMLC, CBI, IBS and WHRB are sometimes referred to collectively 
as ``the Services.'' The Services are Internet webcasters or broadcast 
radio simulcasters that each employ a technology known as streaming, 
but comprise a range of different business models and music 
programming. DiMA and certain of its member companies that participated 
in the proceeding (namely: AOL, Yahoo!, Microsoft and Live365), Radio 
Broadcasters, SBR and Small Commercial Webcasters are sometimes 
referred to collectively as ``Commercial Webcasters.'' NPR, CPB, 
NRBNMLC, CBI, IBS and WHRB are sometimes referred to collectively as 
``Noncommercial Webcasters.''

II. The Proceedings

A. Pre-Hearing Proceedings

    A notice calling for the filing of Petitions to Participate in this 
proceeding to set the rates and terms for the period beginning January 
1, 2006, and ending on December 31, 2010, was published February 16, 
2005. 70 FR 7970. The Petitions were due by March 18, 2005. Forty-two 
petitions were filed. Following an order to file a Notice of Intention 
to Submit Written Direct Statements, the participants were reduced to 
the following twenty eight: SBR; NPR; NPR Member Stations; CPB; CBI; 
SoundExchange; RLI; IBS; WHRB; Digital Media Association; AOL; Live365; 
Microsoft; Yahoo!; AccuRadio LLC; Discombobulated LLC; Digitally 
Imported, Inc.; Radioio.com LLC; Radio Paradise, Inc.; Educational 
Media Foundation; NRBNMLC; Bonneville International Corp.; Clear 
Channel Communications, Inc.; CBS Radio, Inc.; NRBMLC; Salem 
Communications Corp.; Susquehanna Radio Corp.; and Beethoven.com LLC.
    Following an unsuccessful negotiation period, the Written Direct 
Statements were due October 31, 2005. All of the above filed plus the 
additional following: Mvyradio.com LLC; 3WK; XM Satellite Radio, Inc.; 
Sirius Satellite, Inc.; Infinity Broadcasting Corp.

B. The Direct Cases

    The participants conducted discovery and then began live testimony. 
By the time testimony began, the participants reduced to the following: 
SBR; NPR; NPR Member Stations; CPB; CBI; SoundExchange; RLI; IBS; WHRB; 
Digital Media Association; AOL; Yahoo!; AccuRadio LLC; Discombobulated 
LLC; Digitally Imported, Inc.; Mvyradio.com LLC; Radioio.com LLC; Radio 
Paradise, Inc.; 3WK LLC; Educational Media Foundation; NRBNMLC; 
Bonneville International Corp.; Clear Channel Communications, Inc.; 
NRBMLC; and Susquehanna Radio Corp.
    Testimony was taken from May 1, 2005, through August 7, 2006. 
SoundExchange presented the testimony of the following 14 witnesses: 
(1) John Simson, SoundExchange, executive director; (2) Barrie Kessler, 
SoundExchange, chief operating officer; (3) James Griffin, One House 
LLC, chief executive officer; (4) Erik Brynjolfsson, MIT Sloan School 
of Management, professor of management and director of Center for 
eBusiness at MIT; (5) Michael Pelcovits, MiCRA, economic consultant; 
(6) Mark Eisenberg, SONY BMG, senior vice president of business and 
legal affairs; (7) Lawrence Kenswil, Universal eLabs, a division of 
Universal Music Group, president; (8) Michael Kushner, Atlantic Records 
Group, business and legal affairs; (9) Stephen Bryan, Warner Music 
Group, vice president of strategic planning and business development; 
(10) Harold Bradley, American Federation of Musicians of United States 
and Canada, vice president; (11) Jonatha Brooke, songwriter and 
performer, owner of Bad Dog Records; (12) Cathy Fink, songwriter and 
performer; (13) Bruce Iglauer, Alligator

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Records, an independent blues label, founder; and (14) Mark Ghuneim, 
Wiredset, LLC, chief executive officer.
    Royalty Logic, Inc. presented the testimony of Ronald A. Gertz, 
president.
    The Services presented the testimony of the following 24 witnesses: 
Digital Media Association and its Member Companies: (1) Adam B. Jaffe, 
Brandeis University, professor in economics; (2) Christine Winston, 
America Online, executive director of programming strategy and 
planning; (3) David Porter, Live365, general manager of business 
development; (4) Jonathan Potter, DiMA, executive director; (5) N. Mark 
Lam, Live365, chairman and chief executive officer; (6) Robert D. 
Roback, Yahoo! Music, general manager; (7) J. Donald Fancher, Deloitte 
and Touche Financial Advisory Services LLP; (8) Jay Frank, Yahoo!, 
programming and label relations; (9) Fred Silber, Microsoft, business 
development manager for MSN; (10) Eric Ronning, Ronning Lipset Radio; 
(11) Jack Isquith, American Online Music, executive director Music 
Industry Relations; (12) Karyn Ulman, Music Reports, Inc.;
    Radio Broadcasters: (13) Dan Halyburton, Susquehanna Radio, 
research, engineering and programming; (14) Roger Coryell, San 
Francisco Bonneville Radio Group, director strategic marketing and 
Internet; (15) Russell Hauth, National Radio Broadcasters Music 
Licensing Committee, executive director; (16) Brian Parsons, Clear 
Channel Radio, vice president of technology;
    Small Commercial Webcasters: (17) Kurt Hanson, AccuRadio, president 
and RAIN newsletter, publisher;
    National Public Radio: (18) Kenneth Stern, NPR, chief executive 
officer;
    Intercollegiate Broadcasting System, Inc. and Harvard Radio 
Broadcasting Co., Inc.: (19) Frederick J. Kass, Jr., IBS, chief 
operating officer; (20) Michael Papish, HRBC, treasurer and Media 
Unbound, president;
    Collegiate Broadcasters, Inc.: (21) William Robedee, CBI, past 
chair and KTRU, Rice University, manager; (22) Joel R. Willer, KXUL, 
University of Louisiana, Monroe, faculty advisor;
    National Religious Broadcasters Noncommercial Music Licensing 
Committee: (23) Eric Johnson, NRBNMLC, board member and CDR Radio 
Network, music director; and
    SBR Creative Media, Inc.: (24) David Rahn, president.

C. The Rebuttal Cases

    The participants filed Written Rebuttal Statements on September 29, 
2006. Discovery was then conducted on the rebuttal evidence. Rebuttal 
testimony was taken from November 6 through November 30, 2006.
    SoundExchange presented the testimony of the following nine 
witnesses: (1) Barrie Kessler, SoundExchange, chief operating officer; 
(2) James Griffin, One House LLC, chief executive officer; (3) Erik 
Brynjolfsson, MIT Sloan School of Management, professor of management 
and director of Center for eBusiness at MIT; (4) Michael Pelcovits, 
MiCRA, economic consultant; (5) Mark Eisenberg, SONY BMG, senior vice 
president of business and legal affairs; (6) Thomas Lee, American 
Federation of Musicians, president; (7) Simon Wheeler, Association of 
Independent Music, chair of New Media Committee; (8) Charles Ciongoli, 
Universal Music Group, North American, executive vice president and 
chief financial officer; and (9) Tom Rowland, Universal Music 
Enterprises, senior vice president, film and television music;
    Royalty Logic, Inc. presented the testimony of the following two 
witnesses: (1) Ronald A. Gertz, president; and (2) Peter Paterno, 
entertainment attorney;
    The Services presented the testimony of the following 16 witnesses:
    Digital Media Association and its Member Companies: (1) Adam B. 
Jaffe, Brandeis University, professor in economics; (2) Christine 
Winston, America Online, executive director of programming strategy and 
planning; (3) N. Mark Lam, Live365, chairman and chief executive 
officer; (4) Robert D. Roback, Yahoo! Music, general manager; (5) J. 
Donald Fancher, Deloitte and Touche Financial Advisory Services LLP; 
(6) Jay Frank, Yahoo!, programming and label relations; (7) Jack 
Isquith, American Online Music, executive director Music Industry 
Relations; (8) Roger James Nebel, FTI Consulting;
    Radio Broadcasters: (9) Keith Meehan, Radio Music Licensing 
Committee, executive director; (10) Eugene Levin, Radio Music Licensing 
Committee, controller; (11) Brian Parsons, Clear Channel Radio, vice 
president of technology; (12) Adam B. Jaffe, Brandeis University, 
professor of economics;
    National Public Radio: (13) Adam B. Jaffe, Brandeis University, 
professor of economics;
    Intercollegiate Broadcasting System, Inc. and Harvard Radio 
Broadcasting Co., Inc.: (14) Jerome Picard, economics professor (ret.); 
(15) Michael Papish, HRBC, treasurer; and
    National Religious Broadcasters Noncommercial Music Licensing 
Committee: (16) Eric Johnson, member of board.
    At the close of all the evidence, the record was closed. In 
addition to the written direct statements and written rebuttal 
statements, the Copyright Royalty Judges heard 48 days of testimony, 
which filled 13,288 pages of transcript, and 192 exhibits were 
admitted. The docket contains 475 entries of pleadings, motions and 
orders.

D. Post-Hearing Submissions and Arguments

    After the evidentiary phase of the proceeding, the participants 
were ordered to file Proposed Findings of Fact and Conclusions of Law 
on December 12, 2006, and Responses to those proposals on December 15, 
2006. The parties were also ordered to submit Stipulated Terms on 
December 15, 2006, but none have been filed. Closing arguments were 
heard on December 21, 2006. Then the matter was submitted to the 
Copyright Royalty Judges for a Determination.\1\
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    \1\ Hereinafter, references to written direct testimony shall be 
cited as ``WDT'' preceded by the last name of the witness and 
followed by the page number. References to written rebuttal 
testimony shall be cited as ``WRT'' preceded by the last name of the 
witness and followed by the page number. References to the 
transcript record shall be cited as ``Tr.'' preceded by the date and 
followed by the page number and the last name of the witness. 
References to proposed findings of fact and conclusions of law shall 
be cited as ``PFF'' or ``PCL,'' respectively, preceded by the name 
of the party that submitted same and followed by the paragraph 
number. References to reply proposed findings of fact and 
conclusions of law shall be cited as ``RFF'' or ``RCL,'' 
respectively, preceded by the name of the party and followed by the 
paragraph number.
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    On March 2, 2007, the Copyright Royalty Judges issued the initial 
Determination of Rates and Terms. Pursuant to 17 U.S.C. 803(c)(2) and 
37 CFR Part 353, the parties filed Motions for Rehearing.\2\ The Judges 
requested the parties to respond to the motions filed, in order to know 
the positions of each party on each of the issues raised in the 
motions, and ordered the parties to file written arguments in support 
of each motion. The parties filed responses and written arguments. 
Having reviewed all motions, written arguments and responses, the 
Judges denied all the motions for rehearing. Order Denying Motions for 
Rehearing, In the Matter of Digital Performance Right in Sound 
Recordings and Ephemeral Recordings, Docket No. 2005-1 CRB DTRA (April 
16, 2007). As reviewed in the said Order, none of the grounds in the 
motions presented the type of exceptional case where the Determination 
is not supported by the

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evidence, is erroneous, is contrary to legal requirements, or justifies 
the introduction of new evidence. 17 U.S.C. 803(c)(2)(A); 37 CFR 353.1 
and 353.2. The motions did not meet the required standards set by 
statute, by regulation and by case law. Nevertheless, the Judges were 
persuaded to clarify two issues raised by the parties. This Final 
Determination includes a transition phase for 2006 and 2007 to use 
Aggregate Tuning Hours (``ATH'') to estimate usage as permitted under 
the prior fee regime. This limited use of an ATH calculation option 
should facilitate a smooth transition to the fee structure adopted in 
this Final Determination. Next, the regulations are corrected to refer 
to ``digital audio transmissions'' in place of the phrase ``Internet 
transmissions.''

III. The Statutory Criteria for Setting Rates and Terms
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    \2\ Motions were filed by DiMA, IBS, WHRB, NPR, Radio 
Broadcasters, RLI, Small Commercial Webcasters, SoundExchange and 
CBI.
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A. The Statutory Background

1. Music Copyright Law in General
    Section 102 of the Copyright Act of 1976 (the ``Copyright Act'') 
identifies various categories of works that are eligible for copyright 
protection. 17 U.S.C. 102. These include ``musical works'' and ``sound 
recordings.'' Id. at 102(2) and 102(7). The term ``musical work'' 
refers to the notes and lyrics of a song, while a ``sound recording'' 
results from ``the fixation of a series of musical, spoken, or other 
sounds.'' Id. at 101. A song that is sung and recorded will constitute 
a sound recording by the entity that records the performance, and a 
musical work by the songwriter. Another performer may record the same 
song and that performance will result in another sound recording, but 
the musical work remains with the songwriter. Under these facts, there 
are two sound recordings and one musical work as a result of the two 
recordings of the same song. Typically, a record label owns the 
copyright in a sound recording and a music publisher owns the copyright 
in a musical work. 5/4/06 Tr. 24:11-27:16 (Simson).
    Under the 1976 Copyright Act, a copyright owner receives a bundle 
of exclusive rights set forth in section 106. 17 U.S.C. 106. Among them 
is the right to make or authorize the performance to the public of a 
copyrighted work. The performance right is granted to all categories of 
copyrighted works with one exception: Sound recordings. Thus, while the 
owner of a musical work enjoys the performance right, the owner of a 
sound recording does not.\3\ Congress did not begin to address this 
inequality until the end of the twentieth century.
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    \3\ Indeed, copyright owners of musical works have enjoyed the 
performance right since the nineteenth century.
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2. The DPRA
    In 1995, Congress enacted the Digital Performance Right in Sound 
Recordings Act (``DPRA''), Public Law 104-39, 109 Stat. 336 (1995), 
which added a new section 106(6) to the Copyright Act. That provision 
grants copyright owners of sound recordings a limited performance right 
to make or authorize the performance of their works ``by means of a 
digital audio transmission.'' 17 U.S.C. 106(6). Often referred to as 
the ``digital performance right,'' the right was further limited by the 
creation of a statutory license for certain nonexempt, noninteractive 
subscription services and preexisting satellite digital audio radio 
services. 17 U.S.C. 114. The statutory license permits these services, 
upon compliance with certain statutory conditions, to make those 
transmissions without obtaining consent from, or having to negotiate 
license fees with, copyright owners of the sound recordings they 
perform. Id. Congress established procedures to facilitate voluntary 
negotiation of rates and terms including a provision authorizing 
copyright owners and services to designate common agents on a 
nonexclusive basis to negotiate licenses--as well as to pay, to 
collect, and to distribute royalties-- and a provision granting 
antitrust immunity for such actions. Id.
    Absent agreement among all the interested parties, the Librarian of 
Congress was directed to convene a Copyright Arbitration Royalty Panel 
(``CARP'') to recommend royalty rates and terms. Congress directed the 
CARP to set a royalty rate for the subscription services' statutory 
license that achieves the policy objectives in section 801(b)(1) of the 
Copyright Act. Id.
    Under the DPRA, copyright owners must allocate one-half of the 
statutory licensing royalties that they receive from the subscription 
services to recording artists. Forty-five percent of these royalties 
must be allocated to featured artists; 2\1/2\ percent of the royalties 
must be distributed by the American Federation of Musicians to non-
featured musicians; and 2\1/2\ percent of the royalties must be 
distributed by the American Federation of Television and Radio Artists 
to non-featured vocalists. 17 U.S.C. 114(g).
3. The DMCA
    The new statutory license for digital audio transmission of sound 
recordings was expanded in the Digital Millennium Copyright Act of 1998 
(``DMCA''), Public Law 105-304, 112 Stat. 2860 (1998). It provided that 
certain digital transmissions and retransmissions, typically referred 
to as webcasting, are subject to the section 106(6) digital performance 
right and that webcasters who transmit/retransmit sound recordings on 
an interactive basis, as defined in section 114(j), must obtain the 
consent of, and negotiate fees with, individual owners of those 
recordings. However, webcasting would be eligible for statutory 
licensing when done on a non-interactive basis. Accordingly, Congress 
created another statutory license in sections 114(d)(2) & (f)(2) for 
``eligible nonsubscription transmissions,'' which include non-
interactive transmissions of sound recordings by webcasters. 17 U.S.C. 
114(d)(2). To qualify for that license, the webcaster must comply with 
several conditions in addition to those that the DPRA applied to 
preexisting subscription and satellite radio services. As with these 
service royalties, webcaster royalties are allocated on a 50-50 basis 
to copyright owners and to performers.
    Congress adopted the DPRA voluntary negotiation and arbitration 
procedures for the DMCA webcaster performance license. 17 U.S.C. 
114(e), (f). However, it changed the statutory standard for determining 
rates and terms. The new standard is to determine what ``most clearly 
represent the rates and terms that would have been negotiated in the 
marketplace between a willing buyer and a willing seller.'' 17 U.S.C. 
114(f)(2)(B).
    Congress also recognized that webcasters who avail themselves of 
the section 114 license may need to make one or more temporary or 
``ephemeral'' copies of a sound recording in order to facilitate the 
transmission of that recording. Accordingly, Congress created a new 
statutory license in section 112(e) for such copies and extended that 
license to services that transmit sound recordings to certain business 
establishments under the section 114(d)(1)(c)(iv) exemption created by 
the DPRA. Congress retained the DPRA voluntary negotiation and 
arbitration procedures for the section 112 ephemeral license. 17 U.S.C. 
112(e)(2), (3). Congress again applied the willing buyer/willing seller 
standard applicable to the section 114 webcaster performance license. 
17 U.S.C. 112(e)(4). The webcasting and

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ephemeral statutory licenses created by the DMCA are the subject of 
this proceeding.
    The two DMCA licenses were the subject of one prior proceeding. 
Determination of Reasonable Rates and Terms for the Digital Performance 
of Sound Recordings and Ephemeral Recordings (Final Rule), 67 FR 45240 
(July 8, 2002) (codified at 37 CFR part 261) (``Webcaster I''). After a 
recommendation from a CARP, the Librarian applied the statutory 
standard to determine rates and terms. Many of the parties in this 
proceeding participated in that prior proceeding.
4. The Reform Act
    Congress enacted a new system to administer copyright royalties 
with the Copyright Royalty and Distribution Reform Act of 2004 (the 
``Reform Act''), Public Law 108-419, 118 Stat. 2341. The Copyright 
Royalty Judges were established to perform the functions previously 
served by the Copyright Royalty Tribunal and the Librarian of Congress. 
They were appointed January 9, 2006, and took over this proceeding.

B. Section 114(f)(2)

1. The Statutory Language
    The criteria for setting rates and terms for the section 114 
webcaster performance license are enunciated under 17 U.S.C. 
114(f)(2)(B), which provides in pertinent part:

    * * * Such rates and terms shall distinguish among the different 
types of eligible nonsubscription transmission services then in 
operation and shall include a minimum fee for each such type of 
service, such differences to be based on criteria including, but not 
limited to, the quantity and nature of the use of sound recordings 
and the degree to which use of the service may substitute for or may 
promote the purchase of phonorecords by consumers. In establishing 
rates and terms for transmissions by eligible nonsubscription 
services and new subscription services, the Copyright Royalty Judges 
shall establish rates and terms that most clearly represent the 
rates and terms that would have been negotiated in the marketplace 
between a willing buyer and a willing seller. In determining such 
rates and terms, the Copyright Royalty Judges shall base [their] 
decision on economic, competitive and programming information 
presented by the parties, including--
    (i) whether use of the service may substitute for or may promote 
the sales of phonorecords or otherwise may interfere with or may 
enhance the sound recording copyright owner's other streams of 
revenue from its sound recordings; and
    (ii) the relative roles of the copyright owner and the 
transmitting entity in the copyrighted work and the service made 
available to the public with respect to relative creative 
contribution, technological contribution, capital investment, cost, 
and risk.

17 U.S.C. 114(f)(2)(B).

    The statute further directs the Judges to set ``a minimum fee for 
each such type of service'' and grants the Judges discretion to 
consider the rates and terms for ``comparable types of digital audio 
transmission services and comparable circumstances under voluntary 
license agreements'' negotiated under the voluntary negotiation 
provisions of the statute. Id.
2. The Relationship of the Statutory Factors to the ``Willing Buyer/
Willing Seller'' Standard
    Webcaster I clarified the relationship of the statutory factors to 
the willing buyer/willing seller standard. The standard requires a 
determination of the rates that a willing buyer and willing seller 
would agree upon in the marketplace. In making this determination, the 
two factors in section 114(f)(2)(B)(i) and (ii) must be considered, but 
neither factor defines the standard. They do not constitute additional 
standards, nor should they be used to adjust the rates determined by 
the willing buyer/willing seller standard. The statutory factors are 
merely to be considered, along with other relevant factors, to 
determine the rates under the willing buyer/willing seller standard. 
Webcaster I; In re Rate Setting for Digital Performance Right in Sound 
Recordings and Ephemeral Recordings, No. 2000-9 CARP DTRA 1 & 2 
(``Webcaster I Carp Report'').
3. The Nature of ``The Marketplace''
    The parties agree that the directive to set rates and terms that 
``would have been negotiated'' in the marketplace between a willing 
buyer and a willing seller reflects Congressional intent for the Judges 
to attempt to replicate rates and terms that ``would have been 
negotiated'' in a hypothetical marketplace. Webcaster I CARP Report at 
21. The ``buyers'' in this hypothetical marketplace are the Services 
(and other similar services) and this marketplace is one in which no 
statutory license exists. Id. See also Noncommercial Educational 
Broadcasting Compulsory License (Final rule and order), 63 FR 49823, 
49835 (September 18, 1998) (``[I]t is difficult to understand how a 
license negotiated under the constraints of a compulsory license, where 
the licensor has no choice but to license, could truly reflect `fair 
market value.' ''). The ``sellers'' in this hypothetical marketplace 
are record companies, and the product being sold consists of a blanket 
license for the record companies' complete repertoire of sound 
recordings. Webcaster I, 67 FR 45244 (July 8, 2002).
4. The Appropriate Willing Buyer/Willing Seller Rate
    As noted, the statute directs us to ``establish rates and terms 
that most clearly represent the rates and terms that would have been 
negotiated in the marketplace.'' 17 U.S.C. 114(f)(2)(B) (emphasis 
added). In the hypothetical marketplace we attempt to replicate, there 
would be significant variations, among both buyers and sellers, in 
terms of sophistication, economic resources, business exigencies, and 
myriad other factors. Congress surely understood this when formulating 
the willing buyer/willing seller standard. Accordingly, the Judges 
construe the statutory reference to rates that ``most clearly represent 
the rates * * * that would have been negotiated in the marketplace'' as 
the rates to which, absent special circumstances, most willing buyers 
and willing sellers would agree. Webcaster I, 67 FR 45244, 45245 (July 
8, 2002); Webcaster I CARP Report at 25, 26.

C. Section 112(e)

    The criteria for setting rates and terms for the section 112 
ephemeral license are enunciated under 17 U.S.C. 112(e)(4), which 
provides in pertinent part:

    The Copyright Royalty Judges shall establish rates that most 
clearly represent the fees that would have been negotiated in the 
marketplace between a willing buyer and a willing seller. In 
determining such rates and terms, the Copyright Royalty Judges shall 
base their decision on economic, competitive, and programming 
information presented by the parties, including--
    (A) whether use of the service may substitute for or may promote 
the sales of phonorecords or otherwise interferes with or enhances 
the copyright owner's traditional streams of revenue; and
    (B) the relative roles of the copyright owner and the 
transmitting organization in the copyrighted work and the service 
made available to the public with respect to relative creative 
contribution, technological contribution, capital investment, cost, 
and risk.

17 U.S.C. 112(e)(4). As does section 114, this section further directs 
the Judges to set ``a minimum fee for each type of service.'' 17 U.S.C. 
112(e)(4). Although section 112 does not explicitly grant the Judges 
discretion to consider the rates and terms for comparable types of 
services, it does explicitly grant discretion to ``consider the rates 
and terms under voluntary license agreements'' negotiated under the 
provisions of the statute. 17 U.S.C. 112(e)(4). Accordingly, while the 
language of the two sections varies in minor respects, the Judges 
interpret the criteria for setting rates and terms as

[[Page 24088]]

essentially identical. See Webcaster I Order of July 16, 2001, at 5.

IV. Determination of Royalty Rates

A. Application of Section 114 and Section 112

    Based on the applicable law and relevant evidence received in this 
proceeding, the Copyright Royalty Judges must determine rates for two 
licenses, the section 114 webcaster performance license and the section 
112 ephemeral reproduction license. The Copyright Act requires that the 
Copyright Royalty Judges establish rates for each of these two licenses 
that most clearly represent those ``that would have been negotiated in 
the marketplace between a willing buyer and a willing seller'' and 
directs the Copyright Royalty Judges to set a minimum fee for each 
license. In the case of both licenses, the Copyright Act requires the 
Copyright Royalty Judges to take into account evidence presented on 
such factors as (1) whether the use of the webcasting services may 
substitute for or promote the sale of phonorecords and (2) whether the 
copyright owner or the service provider make relatively larger 
contributions to the service ultimately provided to the consuming 
public with respect to creativity, technology, capital investment, cost 
and risk. 17 U.S.C. 114(f)(2)(B) and 17 U.S.C. 112 (e)(4).
    Having carefully considered the relevant law and the evidence 
received in this proceeding, the Copyright Royalty Judges determine 
that the appropriate section 114 performance license rate is a per 
performance usage rate for Commercial Webcasters and an annual flat 
per-station rate for Noncommercial Webcasters for use up to a specified 
cap coupled with a per performance rate for use above the cap, while 
the appropriate section 112 reproduction license rate is deemed to be 
included in the applicable respective section 114 license rates.
    The applicable rate structure is the starting point for the 
Copyright Royalty Judges' determination.

B. The Rate Proposals of the Parties and the Appropriate Royalty 
Structure for Section 114 Performance Licenses

1. Commercial Webcasters
    The contending parties present several alternative rate structures 
for Commercial Webcasters. In its final revised rate proposal, 
SoundExchange argues in favor of a monthly fee equal to the greater of: 
30% of gross revenues or a performance rate beginning at $.0008 per 
performance in 2006 and increasing annually to $.0019 by 2010.\4\ This 
fee structure is proposed for nonsubscription services and is modified 
to add a third alternative in its ``greater of'' formulation of a $1.37 
per subscriber minimum for new subscription services.\5\ An exception 
to this ``greater of'' formulation is proposed for so-called ``bundled 
services'' from which SoundExchange seeks a per performance rate of 
$.002375 to be adjusted each year by the change in the CPI-U. 
SoundExchange's Revised Rate Proposal (filed September 29, 2006) at 2-
12.
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    \4\ The latter $.0019 per performance rate is to be adjusted by 
the change in the CPI-U from December 2005 to December 2009 
(accordingly, if the CPI-U increases by 3% in each of these four 
twelve-month periods, the resulting per performance rate for 2010 
would increase from $.0019 to $.00214).
    \5\ In addition, SoundExchange proposes an adjustment to its 
revenue alternative based on time spent listening to music for so-
called ``non-music'' services, a per performance rate of $.002375 to 
be adjusted each year by the change in the CPI-U for ``bundled 
services'' and a 25% premium for transmissions terminating on 
wireless devices for nonsubscription services, new subscription 
services and bundled services.
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    By contrast, DiMA on behalf of certain large commercial webcasters, 
proposes a fee structure under which webcasters could elect a fee equal 
to either $.00025 per performance or $.0038 per Aggregate Tuning Hour 
(``ATH'') or 5.5% of revenue directly associated with the streaming 
service. However, DiMA applies only its per performance usage rate to 
``bundled services'' situations where the bundle price to the consumer 
is not allocated as between the individual component parts of the 
bundle. DiMA PFF at ]] 35-38.
    Smaller commercial webcasters present varying proposals. SBR 
Creative Media, Inc., a privately owned commercial webcaster, proposes 
a fee structure under which webcasters can elect a fee equal to either 
a use metric of $.0033 per Aggregate Tuning Hour (``ATH'') or 4% of 
gross revenue. SBR Creative Media PFF at ] 19. The self-styled Small 
Commercial Webcasters,\6\ in contrast to all the other commercial 
parties, propose a pure revenue-based metric equal to 5% of gross 
revenues. Small Commercial Webcasters PCL at ] 24.
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    \6\ The Small Commercial Webcasters are AccuRadio, LLC; 
Digitally Imported, Inc.; Radioio.com, LLC; Discombobulated, LLC; 
3WK, LLC and Radio Paradise, Inc.
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    Radio Broadcasters propose an annual flat fee \7\ structure 
generally related to usage as reflected in the format of the radio 
station being simulcast over the web. For example, Radio Broadcasters 
propose that music-formatted stations pay a fee ranging from as little 
as $500 per annum for small stations in low revenue ranked markets to 
as much as $8,000 per annum for large stations in high revenue ranked 
markets, but further propose that news, talk, sports and/or business 
stations pay $250 per annum irrespective of station size in low revenue 
ranked markets and $750 per annum irrespective of station size in high 
revenue ranked markets. Finally, Radio Broadcasters propose that 
stations with mixed music/non-music formats pay a percentage of the 
music format fee, depending on the percentage of programming identified 
as music programming. Radio Broadcasters PFF at ]] 325-338.
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    \7\ Radio Broadcasters further propose that the structure 
increase across the board by 4% annually over the term of the 
license.
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    In short, among the parties on both sides who have proposed rates 
covering Commercial Webcasters, only Small Commercial Webcasters 
propose a fee structure based solely on revenue. However, in making 
their proposal, this group of five webcasters clearly is unconcerned 
with the actual structure of the fee, except to the extent that a 
revenue-based fee structure especially one in which the percent of 
revenue fee is a single digit number (i.e., 5%)--can protect them 
against the possibility that their costs would ever exceed their 
revenues.\8\ Their only witness, Kurt Hanson, CEO/President of 
AccuRadio, LLC, in fact, provided testimony indicating that the Small 
Commercial Webcasters were, at bottom, concerned with the amount of the 
fee rather than the structure of the fee. (``Obviously, were there to 
be a sound recording royalty based on performances that was at an 
extremely low rate * * * a percentage-of-revenue model might not be 
required. And just as obviously, a confiscatory percentage-of-revenue 
rate would not allow these companies [the Small Commercial Webcasters] 
to survive.'') Hanson, WDT at 4 n.2. Small Commercial Webcasters' focus 
on the amount of the fee, rather than how it should be structured, is 
further underlined by the absence of evidence submitted by this group 
to identify a basis for applying a pure revenue-based structure to 
them. While, at times, they suggest that their situation as small

[[Page 24089]]

commercial webcasters requires this type of structure, there is no 
evidence in the record about how the Copyright Royalty Judges would 
delineate between small webcasters and large webcasters.\9\ Similarly, 
while Mr. Hanson asserts that a percentage-of-revenue is necessary 
because ``this is a nascent industry'' or because small entrepreneurs 
require such a structure, 8/3/06 Tr. 49:12-22 (Hanson), he offers no 
evidence to support that assertion or to help define the parameters of 
the assertion. Furthermore, the only other self-styled small 
entrepreneur to offer testimony in this proceeding, SBR Creative Media 
Inc., specifically includes a usage metric in its rate proposal and 
neither SBR Creative Media, Inc. nor the Small Commercial Webcasters 
offers any evidence to distinguish between their respective situations.
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    \8\ It must be emphasized that, in reaching a determination, the 
Copyright Royalty Judges cannot guarantee a profitable business to 
every market entrant. Indeed, the normal free market processes 
typically weed out those entities that have poor business models or 
are inefficient. To allow inefficient market participants to 
continue to use as much music as they want and for as long a time 
period as they want without compensating copyright owners on the 
same basis as more efficient market participants trivializes the 
property rights of copyright owners. Furthermore, it would involve 
the Copyright Royalty Judges in making a policy decision rather than 
applying the willing buyer/willing seller standard of the Copyright 
Act.
    \9\ Indeed, since none of the small commercial webcasters 
participating in this proceeding provided helpful evidence about 
what demarcates a ``small'' commercial webcaster from other 
webcasters at any given point in time, any determination that a 
revenue-based metric was somehow uniquely applicable to small 
commercial webcasters would be speculative.
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    While each of the remaining contending parties--SoundExchange, 
DiMA, Radio Broadcasters and SBR Creative Media, Inc.--proposes a fee 
structure for Commercial Webcasters that contains revenue-based 
elements as well as either usage elements or a usage alternative, from 
the evidence of record, the Copyright Royalty Judges conclude that 
numerous factors weigh in favor of a per-performance usage fee 
structure for Commercial Webcasters.
    First, as aptly stated by Dr. Adam Jaffe, revenue merely serves as 
``a proxy'' for what ``we really should be valuing, which is 
performances.'' Jaffe, WDT Section N, Designated Testimony (Jaffe WDT 
in Webcaster I at 22). By contrast, a per-performance metric ``is 
directly tied to the nature of the right being licensed, unlike other 
bases such as revenue * * * of the licensee.'' Id. (Emphasis in 
original.) The more intensively an individual service is used and 
consequently the more the rights being licensed are used, the more that 
service pays and in direct proportion to the usage.\10\ Jaffe, WDT 
Section N, Designated Testimony (Jaffe WDT in Webcaster I at 21-22). As 
Dr. Jaffe points out, with a usage metric, the resultant ``scaling'' of 
the royalty paid to the extent of use ``is intuitively appealing and is 
a common feature'' of intellectual property licenses. Jaffe, WDT at 32. 
Dr. Jaffe notes that, by contrast, ``Revenue is a less exact proxy for 
the scale of activity, because the revenue that a licensee derives, 
even from its music-related activities can be influenced by a variety 
of factors that have nothing to do with music.'' Id. Therefore, Dr. 
Jaffe cautions that a revenue-based metric should only be used as a 
proxy for a usage-based metric where the revenue base used for royalty 
calculation is ``carefully defined to correspond as closely as possible 
to the intrinsic value of the licensed property.'' Id. The Copyright 
Royalty Judges do not find a sufficient clarity of evidence based on 
the record in this proceeding to produce a revenue-based metric that 
can serve as a good proxy for a usage-based metric. Furthermore, there 
was no persuasive evidence offered by any commercial webcasting/
simulcasting party to indicate that a usage-based metric is not readily 
calculable and, that as a consequence, the Copyright Royalty Judges 
must resort to some proxy metric in reaching their fee determination.
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    \10\ Dr. Erik Brynjolfsson is similarly of the opinion that 
``the rates paid by a given company should take into account that 
different companies use different amounts of music.'' 11/21/06 Tr. 
251:2-18 (Brynjolfsson).
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    Second, percentage-of-revenue models present measurement 
difficulties because identifying the relevant webcaster revenues can be 
complex, such as where the webcaster offers features unrelated to 
music. Webcaster I noted this particular difficulty. 67 FR 45249 (July 
8, 2002). Mixed format webcasters/simulcasters continue to make up a 
significant part of the commercial webcasting market and, in a number 
of cases, generate the more significant portion of their revenues from 
non-music programming. RBX1; RBX7; RBX20; 7/27/06 Tr. 283:7-285:12 
(Hauth). Clearly, questions surrounding the proper allocation of 
revenues related to music use in such instances present greater 
complexity than a straightforward use of a usage-based approach.\11\
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    \11\ This is illustrated in the SoundExchange rate proposal 
where an additional adjustment is made to the proposed revenue rate 
where services conform to a definition of ``non-music services'' as 
measured by the listening time of end users. By contrast, in the 
same rate proposal no such adjustment needs to be made to the 
proposed usage rate for the same services. The added information 
necessary for the adjustment as well as the process of adjustment to 
the revenue-based metric clearly would raise the transaction costs 
of implementing a revenue rate structure as compared to the usage-
based metric. SoundExchange's Revised Rate Proposal (filed September 
29, 2006) at 11-12.
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    Third, percentage of revenue metrics ultimately demand a clear 
definition of revenue so as to properly relate the fee to the value of 
the rights being provided, and no such clear definition has been 
proffered by the parties. Indeed, the definition of revenue has been a 
point of substantial contention between two of the parties in this 
proceeding. SoundExchange sought an expansive definition of revenue, 
ostensibly covering revenues from subscription fees, advertisements (of 
many kinds including advertisements directly and indirectly derived 
from webcasting), sales of products and commissions from third party 
sales, software fees and sales of data. SoundExchange's Revised Rate 
Proposal (filed September 29, 2006) at 12-17. But the Copyright Royalty 
Judges are not persuaded that all the elements of the SoundExchange 
definition of revenue have been shown, in every instance, to be related 
to the use of the rights provided to licensees.\12\ For example, there 
is some evidence presented by the Radio Broadcasters that on-air 
talent, programming director contributions and marketing skills impact 
the revenues of simulcasting webcasters. Radio Broadcasters PFF at ]] 
234, 237, 240. DiMA has proposed a much more restrictive definition of 
revenue as part of its rate proposal which it seeks to support through 
the testimony of its witness, Donald Fancher. On the whole, we find 
little to recommend Mr. Fancher's testimony, but the Copyright Royalty 
Judges do observe that even Mr. Fancher conceded that, on various 
points, the DiMA proposed definition was unclear. 6/22/06 Tr. 292:11-
295:14; 308:1-309:1; 311:15-312:10; 315:17-317:14 (Fancher). The 
absence of persuasive evidence of what constitutes an unambiguous 
definition of revenue that properly relates the fee to the value of the 
rights being provided militates against reliance on a revenue-based 
metric.
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    \12\ Moreover, the mere process of measuring such an expansive 
array of revenues must necessarily raise transaction costs for the 
parties.
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    Fourth, the use of a revenue-based metric gives rise to difficult 
questions for purposes of auditing and enforcement related to payment 
for the use of the license. The per-performance approach involves the 
relatively straightforward application of a rate to reports of use 
(recordkeeping) data that is already required to be produced by the 
Services. See 37 CFR part 370. While audit and enforcement issues may 
arise even with a pure usage metric, the alternative use of a revenue-
based metric will give rise to additional, different issues of 
interpretation and controversy related to how revenues are defined or 
allocated. See, for example, Radio Broadcasters PFF at ] 258 and 7/31/
06 Tr. 78:3-11, 79:1-13 (Parsons). In other words, the introduction of 
multiple payment systems will augment

[[Page 24090]]

the transactions costs imposed on the parties.
    Fifth, the way that the contending parties, in particular 
SoundExchange and DiMA, suggest using a revenue-based metric in their 
rate proposals does not square with the basic notion agreed to by their 
respective experts (Dr. Brynjolfsson for SoundExchange and Dr. Jaffe 
for DiMA) that the more the rights being licensed are used, the more 
payments should increase in direct proportion to usage. See supra at 
Section IV.B.1. SoundExchange seeks to use the revenue-based metric to 
insure that it will share in any revenue produced by the Services that 
is greater than what it would receive based on a usage rate coupled 
with actual usage. Pelcovits WDT at 28. This could result in a 
situation where the Services would be forced to share revenues that are 
not attributable to music use, but rather to other creative or 
managerial inputs. DiMA, on the other hand, seeks to employ a revenue-
based metric to protect against the failure of revenues produced by the 
Services (particularly as they pursue a shift to advertising-supported 
business models) to rise to the level necessary to pay for music use 
based on actual usage. Winston WDT at 10. This could result in a 
situation in which copyright owners are forced to allow extensive use 
of their property without being adequately compensated due to factors 
unrelated to music use such as a dearth of managerial acumen at one or 
more Services. The similar potentiality that webcasters might generate 
little revenue and, under a revenue-based metric, produce a situation 
where copyright owners receive little compensation for the extensive 
use of their property was a concern that animated the Librarian to 
approve a per performance metric rather than providing for a revenue-
based payment option in Webcaster I. 67 FR 45249 (July 8, 2002).
    For all of the above reasons, the Copyright Royalty Judges conclude 
that evidence in the record weighs in favor of a per-performance usage 
fee structure for Commercial Webcasters. This does not mean that some 
revenue-based metric could not be successfully developed as a proxy for 
the usage-based metric at some time in the future by the parties if the 
problems noted above were remedied. It does mean that the parties to 
this proceeding have not overcome these problems in the context of the 
proposals they have offered in this proceeding.\13\
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    \13\ While both SoundExchange and DiMA have pointed to a number 
of agreements covering music rights that embody an alternative 
revenue-based metric, they have not shown: (1) Whether those 
agreements have overcome these problems or, (2) if so, how those 
agreements have overcome these problems or, (3) most importantly, 
how their proposed rate structures embody comparable mechanisms for 
overcoming these problems. Nor have they demonstrated whether these 
other agreements have been negotiated with a revenue-based option in 
the context of comparable circumstances-for example, an agreement 
negotiated with a revenue-based alternative because of an inability 
of some services to account for performances would not be comparable 
to the circumstances at hand because of our recordkeeping 
requirements at 37 CFR part 370.
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    A further consequence of the Copyright Royalty Judges rejecting the 
revenue-based metric as a proxy for a usage-based metric is to 
eliminate the need for a rate structure formulated as a ``greater of'' 
or ``lesser of'' comparison between per performance metrics and 
alternative revenue-based metrics.\14\ Therefore, the Copyright Royalty 
Judges determine that a per-performance rate structure will be utilized 
for eligible nonsubscription transmission services, new subscription 
services and bundled services and where such services are commercial 
Services.
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    \14\ In addition, while SoundExchange proposes a third 
alternative--a per subscription minimum dollar amount--to be applied 
to new subscription services, the Copyright Royalty Judges do not 
find the basis for this alternative structure to be supported by 
persuasive evidence. SoundExchange cannot be proposing this per 
subscription alternative because of a lack of music usage data from 
subscription services, because the per subscription alternative 
itself requires such usage data in order to make a pro rata 
distribution of the per subscription minimum to the record 
companies. See Pelcovits WDT at 22. Nor does SoundExchange present 
persuasive evidence that the availability of this per subscription 
alternative is necessary because it is easier to administer and thus 
will reduce transaction costs. Indeed, although SoundExchange makes 
it an alternative to the per-performance fee in its proposed 
structure, SoundExchange presents its purpose as equivalent to the 
function served by the per-performance fee in its proposed fee 
structure. See Pelcovits WDT at 28-29. Moreover, SoundExchange's own 
expert economist, Dr. Brynjolfsson, further notes that in cases 
where webcasters ``monetize'' the value of the sound recording 
license through subscriptions or advertising revenue, ``counting the 
number of plays is a good proxy'' for that value. 5/18/06 Tr. 116:9-
117:14 (Brynjolfsson). For all these reasons, the Copyright Royalty 
Judges decline to establish such a duplicative structure.
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2. Noncommercial Webcasters
    The Copyright Royalty Judges also find that a revenue-based metric 
is not a good proxy for a usage-based metric as applied to 
noncommercial webcasters in the non-interactive webcasting marketplace 
because, in addition to suffering from the same shortcomings discussed 
supra at Section IV.B.1. in the context of the Commercial 
Webcasters,\15\ no evidence of negotiated agreements applying a 
revenue-based metric to Noncommercial Webcasters has been presented by 
any of the parties.
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    \15\ Indeed, the use of a revenue-based metric in connection 
with Noncommercial Webcasters may further exacerbate transactions 
costs where defining of revenue, accounting for revenue and auditing 
of such accounts involve different concepts for the noncommercial, 
non-profit entities that populate this marketplace as compared to 
the accounting concepts and approaches applicable to commercial 
entities. For example, NPR derives significant amounts of its 
revenues from several sources not typically found as a source of 
commercial service revenue, such as underwriting, donations, public 
funds and the NPR Foundation. NPR PFF at ] 18.
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    Only one party in this proceeding, SoundExchange, proposes that 
Noncommercial Webcasters should be subject to a rate structure 
incorporating a revenue-based metric as one alternative means of 
payment. SoundExchange specifically proposes that Noncommercial 
Webcasters pay according to the same structure and rates applicable to 
Commercial Webcasters, previously summarized supra at Section IV.B.1.
    The Noncommercial Webcasters propose a variety of rates that are 
(or could be read as) per station flat rates. For example, NPR proposes 
a flat fee of $80,000 per annum, with successive years after the first 
year increased by a cost-of-living adjustment as determined by the 
change in the CPI. NPR proposes that this flat fee cover all NPR (798) 
and CPB-qualified stations (estimated at 100 or 200). Stern WDT at 13; 
6/27/06 Tr. 154:18-155:18 (Stern).
    The NRBNMLC proposes that non-commercial, non-NPR music stations 
pay a flat annual fee consisting of the lesser of (a) $200 per Internet 
simulcast and up to two associated side channels or (b) $500 per group 
of up to five Internet simulcasts and up to two Internet-only side 
channels per simulcast. The NRBNMLC further proposes that for news, 
talk, business, teaching/talk, or sports stations the aforementioned 
annual fee alternatives drop to $100 and $250 respectively. Mixed 
format stations would pay a pro rata share of these annual fees based 
on the demonstrated music-talk programming breakdown. Finally, NRBNMLC 
proposes that all five years of such fees covering the 2006-2010 
license term be paid in one lump sum at the beginning of the term, 
except that a broadcaster that stops streaming before the end of the 
term would be entitled to a pro rata refund.\16\ NRBNMLC Fee Proposal 
August 1, 2006.
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    \16\ NRBNMLC also proposes a decrease in its annual fees ``to 
match the per station fees of NPR if the NPR station fees are lower 
than the above-stated fees.'' NRBNMLC Fee Proposal August 1, 2006.
---------------------------------------------------------------------------

    IBS' amended rate proposal seeks a $100 annual rate for large 
college stations and a $25 annual rate for

[[Page 24091]]

smaller college stations.\17\ IBS Clarification of Common Rate Proposal 
(August 10, 2006).\18\ CBI proposed a flat annual fee of $175 for 
educational stations. CBI Amended Introductory Statement at 6.
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    \17\ The IBS rates herein summarized were to be applicable only 
to noncommercial educational stations not covered by the annual lump 
sum payment proposed by NPR and CPB.
    \18\ IBS' original proposal consisted of a flat fee of $500 per 
year for music stations and $250 per year for non-music stations, 
with additional payments in the event that the webcaster exceeded 
146,000 aggregate tuning hours in a month. Kass WDT at Ex. A.
---------------------------------------------------------------------------

    For the reasons discussed infra at Section IV.C.2.a., the Copyright 
Royalty Judges determine that Commercial Webcasters and certain 
Noncommercial Webcasters represent two different segments of the 
marketplace. In contrast to the general commercial marketplace, 
agreements produced by the parties in this proceeding covering 
noncommercial services typically structured payments as flat fees. See, 
for example, SERV-D-X 157. Furthermore, no evidence was presented by 
the parties that could be used in a precise way to convert such flat 
annual fees into a reliable per-performance metric. Consequently, only 
a per station metric could be ascertained from such flat fees.
    Flat annual fees do not present the complexity, measurement 
difficulties, accounting and enforcement issues presented by revenue-
based alternatives, and, as a result, do not increase transaction costs 
beyond what might be experienced under a usage-based fee structure. On 
the other hand, flat fees do permit increasing usage without increasing 
payment.
    However, as noted infra at Section IV.C.2.a, the Copyright Royalty 
Judges have determined that in order to preserve the distinction 
between the commercial webcasters and certain noncommercial segments of 
the marketplace over the period of the license term, a cap on usage 
must be established for certain noncommercial webcasters.
    In short, the Copyright Royalty Judges conclude that, on balance, 
the most appropriate rate structure for noncommercial services that can 
be reliably derived from the record of evidence is an annual flat per-
station rate structure for use by certain noncommercial webcasters up 
to a specified cap coupled with a per performance rate for use by 
noncommercial services that exceed the cap.

C. The Section 114 Royalty Rates and Minimum Fees

1. Commercial Webcasters
a. The ``Willing Buyer/Willing Seller Standard''
    As previously noted hereinabove, supra at Section IV.A., the 
Copyright Act requires that the Copyright Royalty Judges establish 
rates for the section 114 performance license that ``most clearly'' 
represent those ``that would have been negotiated in the marketplace 
between a willing buyer and a willing seller.'' Both the copyright 
owners and the commercial services agree that the willing buyer/willing 
seller standard should be applied by the Copyright Royalty Judges in 
determining the rates for the section 114 license and both the 
copyright owners and the commercial services agree that those rates 
should reflect the rates that would prevail in a hypothetical 
marketplace that was not constrained by a statutory license. Finally, 
both copyright owners and commercial services agree that the best 
approach to determining what rates would apply in such a hypothetical 
marketplace is to look to comparable marketplace agreements as 
``benchmarks'' indicative of the prices to which willing buyers and 
willing sellers in this marketplace would agree. SoundExchange PFF at 
]] 215-219; SoundExchange PCL at ]] 4-27; DiMA and Radio Broadcasters 
JPFF at ]] 75-80; DiMA and Radio Broadcasters JPCL at ]] 28-9; DiMA PFF 
at ]] 39-45; Radio Broadcasters PFF at ]] 296-301; SBR Creative Media, 
Inc. PFF at ]] 17; Small Commercial Webcasters PFF at ]] 24-28.
    However, the parties, to some extent, appear to disagree about the 
degree of competition among sellers required by law in the hypothetical 
marketplace, resulting in different definitions of the sellers in the 
hypothetical marketplace.\19\ SoundExchange accuses the Services of 
seeking a marketplace characterized by perfect competition. DiMA and 
the Radio Broadcasters claim that SoundExchange is championing a 
marketplace characterized by monopoly power on the seller's side. 
SoundExchange PCL at ] 38; DiMA and Radio Broadcasters JPCL at ]] 29, 
36. We find that these extreme characterizations miss the mark.
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    \19\ For example, at one extreme, if no competition exists on 
the seller's side of the market (i.e., the seller is a monopolist), 
then the degree of competition observed describes the number of 
sellers in the marketplace (i.e., there is a single seller in the 
marketplace).
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    The question of competition is not confined to an examination of 
the seller's side of the market alone. Rather, it is concerned with 
whether market prices can be unduly influenced by sellers' power or 
buyers' power in the market. This issue was addressed in Webcaster I. 
An effectively competitive market is one in which super-competitive 
prices or below-market prices cannot be extracted by sellers or buyers, 
because both bring ``comparable resources, sophistication and market 
power to the negotiating table.'' 67 FR 45245 (July 8, 2002). In other 
words, neither sellers nor buyers can be said to be ``willing'' 
partners to an agreement if they are coerced to agree to a price 
through the exercise of overwhelming market power.
    Furthermore, we find that in the hypothetical marketplace that 
would exist in the absence of a statutory license constraint, the 
willing sellers are the record companies. Any cognizable entity smaller 
than the record companies makes little sense because, in such cases, 
the larger buyers among the Services would enjoy disproportionate 
market power resulting in below-market prices. At the same time, if the 
sellers' side of the market were characterized by so many sellers as to 
be consistent with perfect competition, the transaction costs to the 
buyers of the copyrights would likely be prohibitive.
    Webcaster I made clear that ``the willing buyers are the services 
which may operate under the webcasting license (DMCA-compliant 
services), the willing sellers are record companies and the product 
consists of a blanket license for each record company which allows use 
of that record company's complete repertoire of sound recordings.'' 67 
FR 45244 (July 8, 2002) (emphasis added). None of the parties has 
adduced persuasive evidence that this definition of sellers has been 
altered in the marketplace as a result of greater or lesser competition 
between these sellers since Webcaster I was issued. For example, no 
party provided any empirical evidence on the elasticity of the demand 
curve facing these firms in the market or, more importantly, whether it 
has changed since Webcaster I. Similarly, no party produced persuasive 
evidence that market share had changed substantially among the record 
companies in the hypothetical marketplace since Webcaster I.\20\
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