Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, 4080-4104 [E8-669]

Agencies

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

[Federal Register Volume 73, Number 16 (Thursday, January 24, 2008)]
[Rules and Regulations]
[Pages 4080-4104]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-669]


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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.

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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 https://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.
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    \1\ 71 FR 1455, Docket No. 2006-1 CRB DSTRA.
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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
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    \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 
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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).
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    \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).
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    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\
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    \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.
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    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\
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    \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 * * * '':
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    \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).
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    \14\ The terms and conditions of the agreement were never 
publicly disclosed.
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    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\
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    \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.
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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