Determination of Royalty Rates and Terms for Transmission of Sound Recordings by Satellite Radio and “Preexisting” Subscription Services (SDARS III), 65210-65270 [2018-26922]

Agencies

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

[Federal Register Volume 83, Number 243 (Wednesday, December 19, 2018)]
[Rules and Regulations]
[Pages 65210-65270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26922]



[[Page 65209]]

Vol. 83

Wednesday,

No. 243

December 19, 2018

Part II





Library of Congress





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Copyright Royalty Board





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37 CFR Part 382





Determination of Royalty Rates and Terms for Transmission of Sound 
Recordings by Satellite Radio and ``Preexisting'' Subscription Services 
(SDARS III); Final Rule

Federal Register / Vol. 83 , No. 243 / Wednesday, December 19, 2018 / 
Rules and Regulations

[[Page 65210]]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 382

[Docket No. 16-CRB-0001 SR/PSSR (2018-2022)]


Determination of Royalty Rates and Terms for Transmission of 
Sound Recordings by Satellite Radio and ``Preexisting'' Subscription 
Services (SDARS III)

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Copyright Royalty Judges announce their final 
determination of the rates and terms for the digital transmission of 
sound recordings and the reproduction of ephemeral recordings by 
preexisting subscription services and preexisting satellite digital 
audio radio services for the period beginning January 1, 2018, and 
ending on December 31, 2027.

DATES: 
    Effective Date: December 19, 2018.
    Applicability Date: The regulations apply to the license period 
beginning January 1, 2018, and ending December 31, 2027.

ADDRESSES: The final determination is posted in eCRB at https://app.crb.gov/. For access to the docket to read the final determination 
and submitted background documents, go to eCRB and search for docket 
number 16-CRB-0001 SR/PSSR (2018-2022).

FOR FURTHER INFORMATION CONTACT: Anita Blaine, CRB Program Assistant, 
by telephone at (202) 707-7658 or by email at crb@loc.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The purpose of the Copyright Royalty Judges (Judges) in the present 
proceeding is to determine the royalty rates and terms applicable to 
Preexisting Subscription Services (PSS) and Satellite Digital Audio 
Radio Services (SDARS) for licenses established by the Copyright Act 
(Act) to utilize copyrighted sound recordings. See 17 U.S.C. 112, 114. 
The Act requires the Judges to determine applicable rates and terms 
every five years. See 17 U.S.C. 801(b)(1), 804(b)(3)(B).
    In determining the PSS rates, the Judges considered proposals from 
both Music Choice and SoundExchange as guideposts rather than as 
benchmarks and determined a rate based upon the current statutory rate 
as adjusted to meet statutory requirements. In determining the SDARS 
rates, the Judges relied most heavily on the opportunity cost approach 
proffered by SoundExchange, but the Judges utilized opportunity cost 
survey data that they found more appropriate than the data relied on by 
SoundExchange.
    After the Judges issued the Initial Determination in this 
proceeding on December 14, 2017, both Sirius XM Radio, Inc., (Sirius 
XM), the lone SDARS, and Music Choice filed timely motions for 
rehearing. SoundExchange filed responses opposing each rehearing 
motion, and Sirius XM and Music Choice filed replies. On April 17, 
2018, the Judges ruled on the rehearing motions. See Order Granting In 
Part and Denying In Part . . . Motion[s] for Rehearing (Apr. 17, 2018). 
By this order, the Judges denied the Music Choice motion and asked for 
additional briefing on the primary issue Sirius XM raised, viz., 
whether the Judges should reduce the royalty rate for SDARS set in the 
Initial Determination to a rate not lower than 14.7% of Gross Revenues. 
Id. at 9. The parties filed briefs and responses and the Judges took 
the issue under advisement.
    On October 11, 2018, the President signed into law the Orrin G. 
Hatch-Bob Goodlatte Music Modernization Act, Public Law 115-264, 132 
Stat. 3676 (Oct. 11, 2018) (MMA). That law includes a provision 
amending section 804(b)(3)(B) of the Copyright Act (Act) to state that 
``with respect to pre-existing satellite digital audio radio services, 
the terms and rates set forth by the Copyright Royalty Judges on 
December 14, 2017, in their initial determination for the rate period 
ending on December 31, 2022, shall be in effect through December 31, 
2027, without any change based on a rehearing under section 803(c)(2) . 
. . .'' Id. sec. 103. As a consequence of this statutory provision, the 
Judges dismissed the pending rehearing as moot. See Order Dismissing 
Rehearing Proceeding (Oct. 11, 2018).
    Based upon the totality of the record, and in accordance with the 
following reasoning and analysis, the Judges determine that the 
applicable rates and terms for the period beginning January 1, 2018,\1\ 
shall be:
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    \1\ In the Judges' Initial Determination in this proceeding, 
they established rates for the period January 1, 2018 through 
December 31, 2022. Under the MMA, these rates shall remain in effect 
until December 31, 2027. See 17 U.S.C. 804(b)(3)(B) (as amended by 
the MMA). Note that all redactions in this publication were made by 
the Copyright Royalty Judges and not by the Federal Register.
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    For PSS: 7.5% of Gross Revenues, as that term is defined for PSS.
    For SDARS: 15.5% of Gross Revenues, as that term is defined for 
SDARS.

II. Background

A. Statutory Licenses

    In 1995, Congress granted to sound recording copyright owners the 
exclusive right ``to perform the copyrighted [sound recording] publicly 
by means of a digital audio transmission.'' \2\ 17 U.S.C. 106(6). 
Concurrently, Congress limited that exclusive right by creating two 
statutory licenses that would enable certain users, including SDARS and 
PSS, to transmit digitally sound recordings without obtaining a 
voluntary license from each copyright owner. See 17 U.S.C. 112(e), 
114(d). The section 112 license (ephemeral license) allows an entity 
that transmits a sound recording digitally to make ephemeral 
phonorecords of the sound recording to facilitate the transmission. 
Section 112(e) describes conditions under which an entity may license 
the ephemeral sound recording.\3\ Section 114 describes limits that 
apply to the digital transmission license.\4\
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    \2\ See Digital Performance Right in Sound Recording Act of 
1995, Public Law 104-39, 109 Stat. 336 (1995).
    \3\ Section 112 provides that a sound recording transmitter may 
make no more than one ephemeral phonorecord, ``unless the terms and 
conditions of the statutory license allow for more.'' 17 U.S.C. 
112(e)(1).
    \4\ Specifically, section 114 excludes from the statutory 
license transmissions by interactive services. See 17 U.S.C. 
114(d)(2)(A)(i).
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B. The Standards for Determining Royalty Rates

    Section 801(b)(1) of the Act provides that the Judges shall ``make 
determinations and adjustments of reasonable terms and rates of royalty 
payments'' for the statutory licenses set forth in, inter alia, section 
114(f)(1) (``digital performance license'').\5\ The digital performance 
license requires that the Judges set rates and terms that are 
``reasonable.'' Id. In addition, section 801(b)(1) provides that these 
``reasonable'' rates shall be calculated to achieve four specific 
objectives:

    \5\ Sirius XM and SoundExchange agree in substance that the 
Judges should conform the SDARS regulations regarding ephemeral 
licenses to the language adopted by the Judges in Web IV. See SEPFF 
] 2371; SXMPFF ] 492. The Judges approve this agreement and adopt it 
in the regulations for the forthcoming rate period. See infra, 
section III.
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    (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

[[Page 65211]]

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).

    In SDARS 1, the Judges detailed the historical treatment of these 
section 801(b)(1) standards. See Determination of Rates and Terms . . . 
73 FR 4080, 4082-84 (Jan. 24, 2008) (SDARS I). There, the Judges noted 
that the section 801(b)(1) factors originated in the protracted 
legislative process that ultimately produced the Copyright Act of 1976. 
The SDARS I Judges examined the legislative history of the 1976 Act and 
noted that the motivation for adopting the four itemized 801(b)(1) 
factors arose from an exchange between two law professors, Professor 
Ernest Gellhorn, on behalf of certain copyright users, and Professor 
Louis H. Pollack, on behalf of certain copyright owners. The issue 
between the professors was the constitutionality of the Copyright 
Royalty Tribunal (CRT), a predecessor of the Copyright Royalty Board. 
As recounted in SDARS I: ``Professor Gellhorn had 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.' '' SDARS I, 73 FR at 4082 (citing 
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).\6\ After consideration of alternative 
potential statutory language, Congress adopted the four-part itemized 
factors included in section 801(b)(1) to supplement the ``reasonable'' 
rate requirement. Id.
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    \6\ The SDARS I Judges also noted that, in like fashion, the 
Register of Copyrights 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.'' Id. (citing 
Second Supplementary Report of the Register of Copyrights on the 
General Revision of the U.S. Copyright Law, Chapter XV, at 31 
(1975)).
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    There is additional legislative history regarding the itemized four 
factors in section 801(b)(1) that aids in understanding how those 
factors should be applied and informs economic analysis under these 
statutory provisions. This legislative history is highlighted by 
dueling positions taken in Congressional testimony in 1967 by the 
licensors, through the National Music Publishers Association (NMPA) and 
its economic witness, Robert R. Nathan, and by the licensees, the 
Recording Industry Association of America (RIAA), through their 
counsel, Thurman Arnold, Esq., a well-known advocate of strong 
antitrust enforcement. See Hearing on S. 597, Subcomm. on Patents, 
Trademarks and Copyrights of the S. Committee on the Judiciary, (Mar. 
20-21, 1967) (Senate Hearing).
    Mr. Nathan criticized any proposed legislation that would subject 
the songwriting industry to a statutory mechanical licensing scheme. 
Id. at 382. He did not agree that licenses in the music industry should 
be treated differently than how ``we generally function under 
competitive marketplace bargaining arrangements whereby most entities 
in our economy bargain for that which goes into the creation of goods 
and services and also bargain the price for which those goods and 
services are sold.'' Id. He further noted that the statutory mechanical 
royalty rate was in part a reaction to an early 20th century concern 
regarding a Supreme Court decision allowing a player-piano manufacturer 
to play songs through the use of perforated paper rolls fed into the 
new devices (player pianos), without a license and without a duty to 
pay royalties to the songwriters and publishers. White-Smith Music 
Publishing Company v. Apollo Company, 209 U.S. 1 (1908). As Mr. Nathan 
explained: ``[T]he Aeolian Co.[,] had gained control of some 80 percent 
of the musical compositions and Congress . . . fear[ed] the threat of 
monopoly in the mechanical reproduction of music.'' Senate Hearing at 
382-83. The Copyright Act of 1909 superseded the effect of White-Smith 
by creating a statutory license and imposing a fixed statutory rate for 
mechanical reproduction of musical compositions.
    In his 1967 testimony, Mr. Nathan advocated that Congress eliminate 
the compulsory license and the statutory rate, and he specifically 
urged Congress to resist replacing the fixed statutory fee with a 
regulatory standard to be implemented by a quasi-adjudicatory body. As 
to the latter point he explained to Congress: ``[O]ne might ask . . . 
whether the music publishing industry has any characteristics of a 
public utility? I submit . . . that there is nothing in the music 
publishing industry which gives [it] the characteristics or the 
elements of a public utility . . . .'' Id. at 383. Mr. Nathan noted 
what he felt was a key distinction: Unlike traditional public utilities 
such as ``railroad systems'' or ``streetcar lines,'' the songwriting 
and publishing industry is ``a creative and nonstandardized area,'' and 
``[m]onopoly and public utility aspects are just not prevalent in this 
industry.'' Id.
    The licensees' opposing position, expressed by Mr. Arnold on behalf 
of the RIAA, contained the seeds of the standard ultimately adopted in 
section 801(b)(1). As Mr. Arnold testified, the statute should include, 
inter alia, ``accepted standards of statutory ratemaking,'' including a 
rate ``that insures the party against whom it is imposed a reasonable 
return on . . . investment'' and ``that divides the rewards for the 
respective creative contributions of the record producers [the 
licensees] and the copyright owners . . . equitably between them.'' Id. 
at 469.
    Mr. Nathan criticized this approach on two fronts. First, he argued 
that the ``personal service'' nature of the songwriting and publishing 
industry precluded application of a ``reasonable rate of return'' 
requirement for establishing the compulsory royalty rate. Second, with 
regard to the division of the ``rewards'' proposal, Mr. Nathan stated 
that ``I have never in all my experience encountered this novel concept 
of dividing rewards for creative contributions as a meaningful and 
relevant standard of ratemaking.'' Id. at 1093-94.\7\
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    \7\ As the present record (and the record in Phonorecords III) 
demonstrates, subsequent to Mr. Nathan's 1967 testimony, the 
economic concept of ``dividing rewards for creative contributions as 
a meaningful and relevant standard of ratemaking'' has blossomed, 
with the application of Opportunity Cost/Efficient Component Pricing 
approaches, Nash Bargaining Solutions, and Shapley Value analyses.
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    Resolution of this 1967 dispute languished until 1976, when 
Professor Gellhorn successfully convinced Congress to adopt an itemized 
standard in the final statute. See F. Greenman & A. Deutsch, The 
Copyright Royalty Tribunal and the Statutory Mechanical Royalty: 
History and Prospect, 1 Cardozo Arts & Ent. L.J. 1, 53, 59 (1982). In 
so doing, Congress did not explicitly address the economic dispute 
between Mr. Arnold and Mr. Nathan regarding the relative merits of a 
market-based rate versus a rate established in some other manner.
    Under the itemized section 801(b)(1) standard, the Judges have the 
discretion to choose a market rate, a market-based rate, or a rate 
unrelated to market evidence. Music Choice v. Copyright Royalty Bd., 
774 F.3d 1000, 1010 (D.C. Cir. 2014) (and citations therein). Any such 
rate would be legally appropriate provided it was not ``arbitrary, 
capricious, an abuse of discretion, or otherwise not in accordance with 
law, or if the facts relied upon by the [Judges]

[[Page 65212]]

have no basis in the record.'' Id. at 1007. Indeed, in Music Choice, 
the D.C. Circuit reaffirmed that ``the Copyright Act gives the Judges 
of the Copyright Royalty Board broad discretion to set rates and terms 
for compulsory licenses of the digital performance of sound 
recordings.'' Id. at 1016 (emphasis added).

C. Prior Proceedings

    This proceeding is not the first in which the Judges or their 
predecessors have applied the section 801(b) factors to determine 
royalty rates.\8\ In SDARS I, the Judges detailed the historical 
treatment of these factors by their predecessors, the Copyright Royalty 
Tribunal and the Librarian in his administration of the Copyright 
Arbitration Royalty Panel (CARP) system. See Determination of Rates and 
Terms . . . , 73 FR 4080, 4082-84 (Jan. 24, 2008) (SDARS I). In SDARS 
I, the Judges chose to ``begin with a consideration and analysis of the 
[market] benchmarks and testimony submitted by the parties, and then 
measure the rate or rates yielded by that process against the [section 
801(b)] statutory objectives'' to reach a decision. Id. at 4084.
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    \8\ The Copyright Royalty Tribunal (CRT) applied the 801(b) 
factors in a section 116 (Jukebox) rate adjustment and a section 115 
(Phonorecords) rate adjustment. The Librarian of Congress, as 
administrator of a Copyright Arbitration Royalty Panel (CARP) issued 
a determination for the section 114 satellite radio license (SDARS 
I). In 2017, the Judges presided over a contested Phonorecords rate 
hearing, the determination of which will issue after the present 
determination and will involve application of the 801(b) policy 
factors to the Phonorecords license.
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    The precedent guiding the present panel of Judges signals an 
analysis in which the Judges may weigh the evidence presented to 
support the rate proposals, including marketplace benchmarks, apply the 
section 801(b) policy factors to assure the final rates are consonant 
with those factors and, if the evidence permits, also establish a zone 
of reasonableness within which the rate shall be set.\9\
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    \9\ The U.S. Court of Appeals for the D.C. Circuit has also 
concluded that the Judges may apply the ``[section 801(b)] . . . 
objectives [to] determine a range of reasonable royalty rates that 
would serve all these objectives adequately but to differing 
degrees, [and] the [Judges are] free to choose among those rates, 
and courts are without authority to set aside the particular rate 
chosen . . . if it lies within a ``zone of reasonableness.'' See 
Recording Indus. Ass'n of America v. Copyright Royalty Tribunal, 662 
F.2d 1, 9 (D.C. Cir. 1981) (footnotes omitted). Thus, the Judges may 
establish such a zone of reasonableness, but are not required to do 
so.
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D. The Present Proceeding

    The Judges commenced the present proceeding with publication of 
notice seeking petitions to participate. See 81 FR 255 (Jan. 5, 2016). 
Seven entities filed petitions to participate.\10\ The Judges dismissed 
the petitions of Music Reports, Inc. and David Powell. Muzak LLC 
withdrew its petition to participate. The parties participating in the 
hearing were George Johnson d/b/a GEO Music Group (GEO), Music Choice, 
Sirius XM Radio, Inc. (Sirius XM), and SoundExchange, Inc. 
(SoundExchange).
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    \10\ Original petitioners included George Johnson d/b/a GEO 
Music Group; Music Choice; Music Reports, Inc.; Muzak LLC; Sirius XM 
Radio, Inc.; SoundExchange, Inc. (SoundExchange); and David Powell. 
SoundExchange appeared on behalf of itself and its members, the 
American Association of Independent Music; the American Federation 
of Musicians of the United States and Canada; the Recording Industry 
Association of America; the Screen Actors Guild and the American 
Federation of Television and Radio Artists; Sony Music 
Entertainment; Universal Music Group; and Warner Music Group.
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    The Judges presided over an evidentiary hearing that commenced on 
April 12, 2017, and ended on May 18, 2017. Parties to the hearing 
presented oral closing argument on July 18. The parties called 35 
witnesses,\11\ including 15 experts.\12\ Of the 856 exhibits marked for 
identification for the hearing (not including illustrative 
presentations by various witnesses) the Judges admitted 511 (including 
those admitted for limited purpose) into evidence during the 
hearing.\13\ On June 14, the parties filed their respective Proposed 
Findings of Fact (PFF) and Proposed Conclusions of Law (PCL). Parties 
filed Reply PFF and PCL on June 29.
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    \11\ In addition to live witnesses, participants also designated 
prior testimony of witnesses in prior proceedings. See 37 CFR 
351.4(b)(2).
    \12\ GEO Music Group (GEO) presented the testimony of George 
Johnson. Mr. Johnson asked to be qualified as an expert in the music 
sound recording business. There being no objection, the Judges 
acknowledged his experience as a songwriter, singer, and independent 
record producer for approximately 30 years and qualified him for 
purposes of the present proceeding as an expert in the music 
business.
    \13\ Immediately prior to and during the hearing in this 
proceeding, participants filed motions seeking to limit or exclude 
opposing parties' evidence. The Judges' conclusions on those motions 
are issued by separate order or orders. References to evidence in 
this Determination are to evidence admitted to the record.
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III. The Section 112 Ephemeral License

    The ephemeral license rates that the Judges are to determine in 
this proceeding shall ``most clearly represent the fees that would have 
been negotiated in the marketplace between a willing buyer and a 
willing seller.'' 17 U.S.C. 112(e)(4). All parties to the present 
proceeding agree that the value of the section 112 ephemeral license is 
linked to the value of the section 114 performance license.\14\ Music 
Choice asked that the Judges include the section 112 rate in the 
overall rate. Sirius and SoundExchange asked the Judges to determine 
that the value of the licenses be allocated 5% to the ephemeral license 
and 95% to the performance license, consistent with the current 
regulations applicable to SDARS, webcasters, and new subscription 
(CABSAT) services. See, e.g., Sirius XM . . . Proposed Findings . . . 
and Conclusions at 234 (SXM PFFCL); Proposed Findings . . . and 
Conclusions of SoundExchange . . . at 938 (SX PFFCL); see 37 CFR 
382.3(c), 382.12(b) (2016).
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    \14\ See Music Choice Written Direct Statement at 6; 
Introductory Memorandum to the Written Statement of Sirius Radio 
Inc. at 1; Proposed Rates and Terms of SoundExchange, Inc. and 
Copyright Owner and Artist Participants at 5.
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    The parties' positions and the Judges' decisions concerning the 
ephemeral license regulations are detailed in section XI.C of this 
Determination; the regulatory language adopted by the Judges is 
attached as Appendix A.

IV. PSS Performance License

A. Background

    The Act defines a PSS as ``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 . . . .'' 17 U.S.C. 
114(j)(11). When Congress enacted that definition, there were three PSS 
entities in existence. See H.R. Rep. No. 105-796, at 81, 85, 89 (Oct. 
8, 1998). Only two remain, and Music Choice was the only PSS that 
participated in this proceeding.\15\ SoundExchange represented 
Copyright Owners in the PSS portion of the proceeding. George Johnson, 
an individual licensor, also proposed a PSS rate.
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    \15\ The other remaining PSS entity, Muzak LLC, filed a Petition 
to Participate, but withdrew it before the deadline for filing 
Written Direct Statements.
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    Music Choice operates a residential audio service that consists of 
50 channels of audio programming delivered to subscribers' televisions. 
Written Direct Testimony of David J. Del Beccaro, Trial Ex. 55, at 4 
(Del Beccaro WDT). Music Choice's services are delivered to customers 
by cable operators and other multichannel video programming 
distributors (MVPDs) as part of customers' digital basic cable service. 
Id.
    In addition to its cable TV-based service, Music Choice makes its 
50 cable channels, plus an additional 25 channels of audio programming, 
available to authenticated television subscribers through its website 
and a

[[Page 65213]]

mobile app. Id. Music Choice describes these internet transmissions as 
``an ancillary part of its residential music business . . . .'' Written 
Rebuttal Testimony of David J. Del Beccaro, Trial Ex. 57, at 25 (Del 
Beccaro WRT).
1. PSS Rates From SDARS II
    The parties in the prior proceeding (SDARS II) reached agreement on 
the rates and terms of the section 112 license prior to the hearing. 
See 78 FR at 23054-56.\16\ Therefore, the Judges' focus in that 
proceeding was limited to determining the appropriate rates and terms 
for the section 114 license. The Judges began with a consideration and 
analysis of the market benchmarks and testimony submitted by the 
parties and then measured the rate or rates yielded by that process 
against the Section 801(b) statutory objectives to reach a decision. 78 
FR at 23055. The Judges repeat that approach in the current proceeding.
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    \16\ In the SDARS II proceeding, SoundExchange and Music Choice 
submitted a joint stipulation with respect to the Section 112(e) 
ephemeral license, and the Judges adopted the proposal based on the 
stipulation. 78 FR at 23055-56. The provision addressing the Section 
112(e) license appears in current CRB Rule 382.3(c). It states that 
``[t]he royalty payable under 17 U.S.C. 112(e) for the making of 
phonorecords used by the Licensee solely to facilitate transmissions 
for which it pays royalties as and when provided in this subpart 
shall be included within, and constitute 5% of, the total royalties 
payable under 17 U.S.C. 112(e) and 114.''
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    In SDARS II, Music Choice advocated adoption of the annual 
royalties it pays to performing rights societies (PROs) (i.e., ASCAP, 
BMI, and SESAC) for the right to perform musical works to subscribers 
of its residential audio service as a precedential benchmark. Indeed, 
Music Choice asserted that the Judges were required to rely on that 
musical works rate. The Judges rejected that contention but analyzed 
whether the rates that Music Choice paid the PROs were a useful 
benchmark. 78 FR at 23056. Music Choice contended that two pieces of 
evidence corroborated use of the musical works rates as a benchmark: 
(1) Decisions from Canada and the United Kingdom concluding that 
royalty rates for sound recordings and musical compositions have 
equivalent value \17\ and (2) results of an economic model called the 
Asymmetric Nash Bargaining Framework (Nash Framework) \18\ offered by 
Music Choice's expert, Professor Gregory Crawford.\19\ Based on his 
analysis, Professor Crawford concluded the PRO rates were an 
appropriate benchmark for the sound recording license at issue.
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    \17\ The Judges dismissed Music Choice's reliance on foreign 
jurisdictions because of a lack of proof of comparability between 
foreign markets and U.S. markets. Further, Music Choice failed to 
convince the Judges that the governing laws were sufficiently 
similar to U.S. law to offer even analogous reasoning. See 78 FR at 
23058.
    \18\ The Nash Framework, as presented in the instant proceeding, 
is discussed in greater detail infra, section IV.C.1.a.
    \19\ Professor Crawford's Nash Framework from SDARS II (as well 
as the Judges' reasons for rejecting it) is described at length in 
the determination and need not be repeated here. See SDARS II, 78 FR 
at 23056-57, 23058. As discussed below, in the current proceeding 
Music Choice does not premise its Nash-based model (or any other 
model) on an asserted equivalency between the value of sound 
recordings and musical works, in light of the Judges' rejection of 
that argument on the record presented in SDARS II. Nonetheless, 
Professor Crawford's Nash Framework in the instant proceeding is 
strikingly similar to his Nash Framework in SDARS II.
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    The Judges disagreed and found that the musical works benchmark 
lacked comparability to the hypothetical PSS market. Id. at 23058. The 
Judges found that the musical works market involved different sellers 
(PROs versus record companies) selling different rights (musical works 
performance rights versus sound recording performance rights) than 
those at issue in this proceeding.\20\
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    \20\ The Judges acknowledged that musical works performance 
rights and sound recording performance rights are likely perfect 
complements, but concluded that, based on the record, such 
complementarity had not been shown to inform the decision regarding 
relative value of the rights.
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    With regard to the Nash Framework, the Judges noted:

    The Nash Framework is a theoretical concept whose goal is to 
evaluate how the surplus from a hypothetical transaction might be 
divided between negotiating parties. Even assuming that the Nash 
Framework has predictive value in some real-world contexts, Music 
Choice provided no data to support the theoretical approximations in 
the market for any intellectual property rights, much less those 
that the Judges are charged with evaluating. Therefore, the Judges 
find that the Nash Framework is not useful corroborating evidence.

78 FR at 23058.\21\
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    \21\ The Judge who dissented from the majority decision offered 
what the majority characterized as a ``more spirited rejection of 
the probative value of the Nash Framework as proffered in this 
context.'' The majority concurred with this assessment but concluded 
that ``as a threshold matter, [the] Nash Framework, without real-
world data to support its predictive capacity, is unworthy of 
further consideration. 78 FR at 23058, n.17.

    For its part, SoundExchange offered certain marketplace agreements 
executed by interactive music streaming services as a benchmark. The 
Judges also rejected this proposed benchmark on comparability grounds. 
78 FR at 23058.\22\
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    \22\ The markets that the proffered agreements covered were 
subscription interactive webcasting, ringtones/ringbacks, and 
digital downloads. The Judges concluded that these markets involve 
the licensing of products and rights separate and apart from the 
right to publicly perform sound recordings in the context of the PSS 
proceeding. The Judges noted that the buyers are different from the 
target PSS market. Thus, the key characteristic of a good 
benchmark--comparability--was not present. 78 FR at 23058. The 
Judges noted that the bundling of Music Choice's services with 
multiple channels of video and other non-music programming 
significantly dim the possibility of market comparators. The Judges 
concluded that ``in the absence of some rational, reasoned 
adjustment to make the music agreements data more comparable to the 
PSS market, the Judges find its probative value in this proceeding 
of only marginal value.'' Id.
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    The Judges concluded that the evidence presented by Music Choice 
framed the lower end of a range of reasonable rates and that presented 
by SoundExchange framed the upper end. 78 FR at 23059. Having rejected 
the parties' respective proffered benchmarks (and proposed 
corroborating evidence) for any purpose other than to frame a range of 
potential rates, the Judges were left with a consideration of the then-
prevailing royalty rate of 7.5% of gross revenues, which fell within 
that range. The Judges started with the then-prevailing rate and 
applied the Section 801(b) factors. Consideration of the section 801(b) 
factors persuaded the Judges that they should adopt that rate, but 
adjust it up to 8.5% based on Music Choice's planned expansion of its 
service from 46 channels to up to 300. The Judges concluded that the 
planned expansion would result in a substantial increase in the number 
of plays of recorded music without any corresponding increase in 
compensation. 78 FR at 23059-60. Nevertheless, the Judges acknowledged 
that the upward adjustment of the benchmark rate was based on projected 
usage that was likely to occur during the rate period. The Judges noted 
that ``[s]hould Music Choice alter its anticipated usage under the 
statutory license in the future, such evidence can be taken into 
account in a future rate proceeding. . . .'' Id. at 23061.
2. Standard for PSS Royalty Rates
    When the Judges determine a section 114 rate for PSS, they 
generally begin with an appropriate rate (or range of rates) and adjust 
it, as appropriate, in accordance with the section 801(b)(1) statutory 
factors. By contrast, the section 112 ephemeral license requires the 
Judges, among other things, to ``establish rates that most clearly 
represent the fees that would have been negotiated between a willing 
buyer and a willing seller.'' 17 U.S.C. 112(e)(4).\23\

[[Page 65214]]

The ephemeral license also requires a minimum fee for each type of 
service offered by a transmitting organization.\24\
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    \23\ Section 112(e)(4) also directs the Judges to base their 
decision on such factors as (1) whether use of the service may 
substitute for or promote the sale of phonorecords or otherwise 
interferes with or enhances the copyright owner's traditional 
streams of revenue and (2) 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).
    \24\ The ephemeral license for both PSS and SDARS is addressed 
in section XI.C.
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    Consistent with this process, in determining the appropriate rate 
for the PSS market for the upcoming rate period, the Judges must first 
identify a starting point for applying the Section 801(b) policy 
factors. A marketplace benchmark, if available, can be a useful 
starting point for applying the Section 801(b) factors. See SDARS II, 
78 FR at 23056. A key component of a marketplace benchmark is that the 
market it purports to represent is comparable to the hypothetical 
target market in the proceeding. See SDARS I, 73 FR at 4088 (`` 
`comparability' is a key issue in gauging the relevance of any 
proffered benchmarks.''). In determining whether a benchmark market is 
comparable, the Judges consider such factors as whether it has the same 
buyers and sellers as the target market and whether they are 
negotiating for the same rights. 78 FR at 23058. ``Although the 
applicable Section 114 statutory standard provides a broader scope for 
analyzing relevant `benchmark' rates than the `willing buyer/willing 
seller standard' . . . , nevertheless potential benchmarks are confined 
to a zone of reasonableness that excludes clearly noncomparable 
marketplace situations.'' 73 FR at 4088.
    In the hypothetical PSS market the buyers are the PSS services, and 
the sellers are the copyright owners of the sound recordings that are 
being transmitted (which most often means record companies). The buyers 
and sellers are negotiating for the same bundle of rights as those 
granted to a PSS under section 114(f)(1)(A) of the Copyright Act to 
make digital subscription transmissions of the copyrighted works.
    When the parties (or the Judges) identify variances in the 
comparability of the hypothetical target market and the proffered 
benchmark market, the Judges will consider reasoned adjustments that 
might more closely align the two markets.\25\ Even when a proffered 
benchmark is not comparable to the target market, however, the Judges 
may use the rates derived from the proffered benchmark as a reference 
point (or guidepost) to help frame a zone of reasonableness within 
which to set an appropriate rate for the upcoming rate period (as they 
did in SDARS II).\26\
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    \25\ When the Judges are faced with proposed benchmarks that are 
not comparable and cannot be made so with reasoned adjustments, the 
Judges reject the proffered benchmarks. See, e.g., SDARS II, 78 FR 
at 23058; SDARS I, 73 FR at 4089-90.
    \26\ See supra, section IV.A.1.
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B. The Parties' Rate Proposals

1. Music Choice's Proposal
    Since 1998, the PSS have paid a fee based on a percentage of gross 
revenues, as that term is defined by regulation.\27\ See SDARS II, 78 
FR 23054, 23056; 63 FR 25394, 25413 (May 8, 1998). Music Choice has 
proposed continuing that rate structure but seeks at least a 34% 
reduction in the current rate of 8.5% of gross revenues, to a rate no 
higher than 5.6% of gross revenues. MC PFF ] 30.
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    \27\ Music Choice also does not propose an alternative per-
subscriber rate should the Judges adopt such a rate structure rather 
than a percent-of-revenue structure. Neither party has proposed to 
combine both rate structures (e.g., in a greater-of structure). 
Given that neither party has advocated a hybrid rate structure nor 
provided sufficient evidence to support such a rate structure in the 
current proceeding, the Judges weigh the arguments and evidence in 
the record to determine the applicable rate structure from the two 
structures that the parties proposed.
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2. SoundExchange's Proposal
    SoundExchange requests that the Judges change the PSS rate 
structure. Rather than the percentage-of-revenue formula, SoundExchange 
proposes that PSS pay a per-subscriber fee that would begin at $0.0190 
in 2018, the first year of the new rate period, and rise to $0.0214 in 
2022, the last year of the rate period. Amended Proposed Rates and 
Terms of SoundExchange, Inc. and Copyright Owner and Artist 
Participants at 7. Although SoundExchange does not offer a percent-of-
revenue alternative to its proposed per-subscriber rates, it 
acknowledges that converting its proposed rates to a percentage-of-
revenue rate would plausibly yield a rate of [REDACTED] % for 2018, the 
first year of the upcoming rate period. SX PFFCL ] 1949; see Written 
Rebuttal Testimony of Gregory Crawford, Trial Ex. 59, ] 113 (Crawford 
WRT).\28\ The evidence in the record supports that this conversion 
estimate is correct; thus the lowest rate that SoundExchange proposes 
([REDACTED] %) exceeds the highest rate that Music Choice proposes 
(5.6%) by [REDACTED] %; it exceeds the current rate by [REDACTED] %, 
assuming no increase in subscribers.\29\
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    \28\ Music Choice's expert, Professor Gregory Crawford, 
estimates that Music Choice would pay [REDACTED] % of its unadjusted 
residential service revenue in sound recording performance royalties 
in 2018 under the CABSAT rates, the basis for SoundExchange's rate 
proposal, compared to the 8.5% it currently pays. Crawford WRT at ] 
113, Table 6. This estimate appears consistent with the effective 
rate that Stingray, a Music Choice competitor, paid in 2015 under 
the CABSAT rates. SX PFFCL ] 1949; Trial Ex. 1017 at SoundX 
000145808.
    \29\ Assuming that the number of subscribers that carried Music 
Choice's service remained flat over the upcoming rate period, the 
annual 3% increases SoundExchange proposes would bring the rates to 
[REDACTED] % for 2019, [REDACTED] % for 2020, [REDACTED] % for 2021, 
and [REDACTED] % for 2022, or [REDACTED] % over the current rate. 
This estimate is consistent with SoundExchange's estimate that a 
CABSAT service pays almost [REDACTED] times as much on a per-
subscriber basis as a PSS. SX PFFCL ] 1940 and evidence cited 
therein. See id. ]] 1934-35 (estimating that Music Choice's PSS 
statutory royalty payment amounts to [REDACTED] cents per listener 
per year whereas for a CABSAT service, the annual per-subscriber 
royalty for 2017 is 22.2 cents).
---------------------------------------------------------------------------

    SoundExchange also proposed a separate rate for internet 
transmissions by a PSS, leading to a dispute between the parties over 
whether a PSS's internet transmissions are included in the PSS license 
and subject to the PSS rate standard. The Judges referred the question 
of categorization of Music Choice's streaming service to the Register 
of Copyrights (Register) for a legal opinion. Analysis of the 
Register's opinion follows in Section IV.D.2.
3. GEO's Rate Proposal
    George Johnson, d/b/a GEO Music Group (GEO) proposed that PSS pay a 
per-subscriber rate of $0.10 in 2018 rising to $0.20 in 2022. Johnson 
WDT at 14. He also proposed a percentage-of-revenue rate of 45% of 
gross revenues. It is unclear whether he proposed that PSS pay both 
components or that they pay them as a greater-of or lesser-of 
structure. Mr. Johnson did not proffer a benchmark or any other 
evidence to support his rate proposals for PSS. He merely stated that 
``[t]hese are estimates from public data and actual royalty statements. 
If the Sirius XM and Music Choice would provide number of listeners per 
station and on a per-play basis, that would help GEO to better 
establish a more reasonable rate.'' Id. The Judges find that there is 
no evidence in the record to support the PSS rates that Mr. Johnson 
proposed and therefore decline to adopt them.\30\
---------------------------------------------------------------------------

    \30\ Mr. Johnson also proposed requiring the PSS to install a 
``buy button'' on their services to promote sales of music 
downloads. 5/3/17 Tr. 2232, 2238 (Johnson). Such proposal is beyond 
the scope of the Section 114 and 112 licenses and therefore beyond 
the Judges' authority in the current proceeding.
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C. Rates for Music Choice's Cable Radio Service

1. Analysis of the Parties' Proffered Benchmarks
a. Music Choice's Proffered Nash Model
    Music Choice, through its expert, Professor Crawford, contended 
that in the absence of an appropriate marketplace benchmark, the best 
way to

[[Page 65215]]

estimate the royalties that would arise in a hypothetical effectively 
competitive market for the PSS sound recording rights is to use an 
economic model. Professor Crawford chose as that model one based upon 
the Nash Bargaining Solution, developed by Nobel-prize-winning 
economist John Nash. Crawford WDT ]] 62, 64. Professor Crawford offered 
a variation of the Nash Framework that the Judges rejected in SDARS II 
as a means of corroborating the proffered musical works benchmark. 
Crawford WDT ] 65.\31\
---------------------------------------------------------------------------

    \31\ Music Choice acknowledged that the Judges rejected its 
proposed musical works benchmark as a marketplace benchmark in SDARS 
II. Rather than proffer a marketplace benchmark from another market, 
however, Music Choice proffered Professor Crawford's Nash Framework, 
not to corroborate the musical works benchmark rejected in SDARS II, 
but as a stand-alone benchmark.
---------------------------------------------------------------------------

    In his Nash Framework proposal, Professor Crawford modeled a single 
record label as the ``upstream'' firm in the negotiation of sound 
recording performance rights to be licensed to a single PSS, the 
``downstream'' firm in the negotiation. Id. ] 67. The Nash Framework is 
based on the assumption that the record label and PSS provider each 
have a certain degree of market power. Id. ] 71. Professor Crawford 
asserted that this assumption is applicable with respect to Music 
Choice given its current product offerings and established 
relationships with MVPDs. Id. ] 73. According to Professor Crawford, 
Music Choice has negotiated long-term contracts with the MVPDs and 
possesses a unique bundle of technology that would be costly and time 
consuming for other firms to duplicate. Id. ] 73. Professor Crawford 
concluded that because both PSS providers and record labels have some 
market power, a non-cooperative bargaining model such as the Nash 
Framework is an appropriate framework for analyzing market outcomes for 
the PSS sound recording performance rights in the absence of a 
compulsory license. Id. ] 75.
    In the Nash Framework three fundamental factors determine how two 
firms would ``split a pie'' in a hypothetical negotiation. These ``Nash 
Factors'' are: (1) The Joint Agreement Profits; (2) each firm's Threat 
Point; and (3) each firm's bargaining power. Id. ] 81.\32\ To determine 
the royalty that would arise in the hypothetical market for sound 
recording performance rights for the PSS over the 2018-2022 rate 
period, Professor Crawford quantified the Nash Factors based on Music 
Choice's costs and revenues of its residential audio service as a 
standalone business. Id. ] 110.
---------------------------------------------------------------------------

    \32\ Joint Agreement Profits are the combined profits to both 
the upstream and downstream firms in the market under study from 
reaching an agreement. For the PSS this means the revenue the PSS 
earns for the PSS less all non-PSS royalty costs that they incur. 
Crawford WDT ] 81. The Threat Point for each firm is the profit it 
would receive when no agreement is reached. Id. The difference 
between the Joint Agreement Profits and the sum of the firms' Threat 
Points is called the ``Incremental Profits'' which are the profits 
the firms could earn by reaching an agreement above and beyond the 
profits they could earn in the absence of an agreement. Id. The 
profits each firm receives in a bargain equals its Threat Point plus 
its Bargaining Power times the Incremental Profits. Id. ] 82. Dr. 
Crawford communicated this formula in mathematical terms as Royalty 
= Threat Point + Bargaining Power * Incremental Surplus. Id. at 
n.69.
---------------------------------------------------------------------------

i. Joint Agreement Profits
    Because Music Choice keeps its books on a consolidated basis, 
Professor Crawford analyzed Music Choice's costs and revenues to 
determine how they would have been allocated if Music Choice operated 
its residential audio service as a standalone business. Id. ]] 122-149; 
4/24/17 Tr. 733-38 (Crawford); 5/18/17 Tr. 4549-52 (Del Beccaro).\33\ 
This process was conducted not in the ordinary course of business but 
to isolate Music Choice's residential audio business for use in the 
Nash Framework and in response to the Judges' observation in SDARS II 
that the residential audio service is the applicable Music Choice 
business line in analyzing the section 114 license. Crawford WDT ] 110. 
Professor Crawford also asserted that isolating the residential audio 
service is necessary to ensure that Music Choice does not subsidize 
this business line with profits from other business lines, which 
Professor Crawford believes would be inconsistent with economic policy 
and the statutory objectives of the PSS license as he understands them 
to be. Id. ] 176; 4/24/17 Tr. 787 (Crawford).
---------------------------------------------------------------------------

    \33\ Music Choice has three business lines: A residential audio 
service, a residential video service, and a commercial audio 
service. Some of Music Choice's subscription fee revenue bundles 
residential audio and video services. Many of Music Choice's costs 
are used in the production of both the residential audio and video 
business lines. Crawford WDT ] 110. According to Professor Crawford, 
the residential audio service remains the most important in terms of 
revenues and company strategy. Professor Crawford asserted that if 
the residential audio service were to cease, Music Choice would 
cease providing any services and would close altogether. Crawford 
WDT ] 129.
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    It would not be fruitful to detail the multistep process Professor 
Crawford conducted to disaggregate costs and revenues to derive inputs 
for the Nash Framework analysis. Nonetheless, it is worth noting that 
many of the steps required judgment calls on Professor Crawford's part 
that undoubtedly affected the inputs he later plugged into the Nash 
Framework.\34\ The Judges do not suggest that Professor Crawford's 
adjustments were erroneous or inappropriate under the circumstances but 
only mention them to highlight the level of discretion and subjectivity 
that Professor Crawford employed in developing the inputs that he fed 
into the Nash Framework. Given the extreme complexity of the process 
that Professor Crawford developed, it would be impracticable if not 
impossible for the Judges to ``back out'' one or more of the 
adjustments Professor Crawford made in developing the model if the 
Judges found they were unwarranted. The discretion that Professor 
Crawford exhibited in disaggregating Music Choice's costs and revenues 
pales, however, in comparison to that he exercised in choosing other 
Nash Factors, such as bargaining power and Threat Point. The great 
degree of discretion in quantifying the inputs in the Nash Framework as 
proposed by Professor Crawford underscores the inherent weakness in the 
Crawford model. The Judges concerns about the model are more applicable 
in the current proceeding than they were in SDARS II because Music 
Choice seeks to elevate the model to benchmark status rather than as 
information to corroborate a proffered rate as was the case in SDARS 
II.
---------------------------------------------------------------------------

    \34\ For example, Dr. Crawford chose to exclude certain legal 
costs that Music Choice incurred or expected to incur related to the 
PSS III proceeding in 2016 and 2017 because those costs relate to 
litigating the 2018-2022 rate proceeding. Instead he substituted 
costs that Music Choice purportedly incurred during the PSS II rate 
period (2013-2017). He also chose to average certain patent 
litigation costs over an eight-year period that Music Choice 
incurred during 2016-2017 because, based on his discussions with 
Music Choice executives, Music Choice historically has incurred such 
patent costs every eight years. Crawford WDT ] 148. Of course, as a 
practical matter, no individual company can know with any reasonable 
degree of certainty when, in the future, it may be sued for patent 
infringement or sue another that allegedly violates one of its 
patents.
---------------------------------------------------------------------------

    Professor Crawford used the disaggregated costs and revenues to 
begin the Nash Framework calculations. The first step in that process 
is to create the first Nash Factor--Joint Agreement Profits--the joint 
economic profits to be shared between a record label and PSS provider 
in the PSS market if an agreement is reached. It is the total economic 
profits that the PSS provider earns before payment of a sound recording 
performance royalty. Crawford WDT ] 92.
    Based on his analysis of Music Choice's financial information as 
discussed above, Professor Crawford estimated the Joint Agreement 
Profits in the hypothetical market for PSS sound

[[Page 65216]]

recording performance rights would range from [REDACTED] in 2018 to 
[REDACTED] in 2022. Crawford WDT ]] 113, 171.
ii. Threat Points
    Professor Crawford then calculated each party's Threat Point, the 
second factor in the Nash Framework. A Threat Point is a theoretical 
construct representing the profit that would accrue to a record label 
and a PSS provider if they are unable to reach an agreement. Each firm 
in a hypothetical negotiation will have a Threat Point. Crawford WDT ] 
67. Under the model, threat points can be positive, negative, or zero. 
Id. at 26 n.71. For a record label, a negative threat point could occur 
where the record label could earn additional profit in a non-PSS market 
(e.g., music downloads) if it reaches an agreement with a PSS in the 
PSS market. If the record label fails to reach the agreement with the 
PSS provider, it loses all prospective profits it would have earned in 
the PSS market and the profits it could have earned in the non-PSS 
market. Id. ] 85.
    The profit each firm earns in a bargain equals its threat point 
plus its bargaining power (discussed below) times incremental profits. 
Id. ] 82. Incremental profits are the difference between the joint 
agreement profits and the sum of the firms' threat points. Id. ] 81. 
Professor Crawford determined that Music Choice's threat point would be 
zero because, in the absence of an agreement between Music Choice and a 
theoretical record label, Music Choice would not be able to offer a 
viable residential audio service and therefore would have economic 
profits of zero. Id. ] 173. Professor Crawford asserted that assigning 
a zero threat point to Music Choice is conservative because it is based 
on an assumption that Music Choice could not offer a viable service in 
the absence of an agreement with a single label.\35\ If Music Choice 
could offer such a service in the absence of the catalog of any record 
label, then Music Choice's threat point would be higher than zero, 
which would suggest that Music Choice should pay a lower royalty rate 
under the model. Id. at 49 n.149.
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    \35\ Rather than postulate the hypothetical PSS market as a 
negotiation between a single PSS and a single record label Professor 
Crawford could have constructed the model as a negotiation between a 
single PSS and a group of record labels. Under this scenario, the 
PSS might reach agreements with some labels but not others. The 
failure of an agreement with certain labels (i.e., smaller labels) 
might not preclude the PSS from offering a service whereas the 
failure of the PSS to reach an agreement with any of the larger 
labels might preclude the PSS from offering any type of service 
(i.e., PSS service or non-PSS service). Under this scenario, the 
assignment to the PSS of a negative threat point might be more 
appropriate than assigning a zero threat point because if Music 
Choice failed to reach an agreement with one major label then it 
might be precluded from offering any service.
---------------------------------------------------------------------------

    Outside of the threat point discussion, however, Professor Crawford 
asserted that Music Choice's residential audio service remains the most 
important in terms of revenues and company strategy. Indeed, Professor 
Crawford asserted that if the residential audio service were to cease, 
Music Choice would cease providing any services and would close 
altogether. Id. ] 129. Placed in the context of the threat point 
discussion, this concession strongly suggests that Music Choice 
deserves a negative threat point under Professor Crawford's model, the 
extent of which would be measured by the amount of profits Music Choice 
would lose if it closed its non-PSS business lines. SoundExchange's 
expert pointed out this inconsistency in Professor Crawford's 
presentation. 5/3/17 Tr. 2461, 2343 (Wazzan) (``Dr. Crawford concedes 
that Music Choice would go out of business altogether without the 
residential music business. So they would lose their commercial and 
video revenue streams. And if you look at the financials, we know that 
Music Choice is forecasting significant profits in its non-PSS lines of 
business.'').
    Music Choice's responses to this disconnect between Professor 
Crawford's threat point assessment and his statements about the primacy 
of Music Choice's residential audio business are unavailing. For 
example, Music Choice contended that the SDARS II decision is precedent 
for treatment of the threat point analysis that Professor Crawford 
employed. Music Choice Reply to SE PFF 2044 at 817-18. The passage from 
SDARS II that Music Choice referred to pertained to an analysis of 
Factor B in Section 801(b)(1), regarding the setting of a rate that 
provides a fair return (for the service) and a fair income (for the 
copyright owners) under existing market conditions. The Judges were 
concerned in that context that Music Choice was making claims of 
unprofitability of its business as a whole to support a downward 
adjustment in the rates under the Section 801(b) factors. The Judges 
pointed out that the subject of the section 114 license was Music 
Choice's residential audio business rather than its entire business, 
which included non-PSS lines. 78 FR at 23059. By that point in the 
determination, the Judges had already discounted the use of the 
Crawford model and the proffered musical works benchmark the results of 
which the model purportedly corroborated. The Judges did not opine on 
how Professor Crawford should have calculated the threat point for his 
own model because the Judges dismissed the usefulness of the model. 78 
FR at 23058 (``without real world data to support its predictive 
capacity [Professor Crawford's application of the Nash Framework] is 
unworthy of further consideration.'').
    Therefore, the Judges agree with SoundExchange's criticism that 
Professor Crawford incorrectly assigned a threat point of zero to Music 
Choice when, under Professor Crawford's own testimony, Music Choice 
would lose profits from non-PSS business lines if Music Choice could 
not reach an agreement with one or more record labels. Based on that 
fact alone, the results of Professor Crawford's model in the current 
proceeding are suspect, but the flaws in Professor Crawford's 
presentation do not end there.
    With respect to the threat point for a hypothetical record label, 
Professor Crawford asserted that it would be zero in the PSS market. As 
for the label's threat point in the non-PSS market (e.g., sales of CDs 
and downloads), Professor Crawford asserted that the analysis was more 
``nuanced.'' Crawford WDT ]] 94-95, 174-175. Due to an alleged 
promotional effect that the PSS has on the label in the non-PSS market, 
Professor Crawford concluded that the record label's threat point could 
be negative. Professor Crawford has no way of estimating the purported 
promotional effect of Music Choice's services in the non-PSS market so 
he assigned a zero threat point to the hypothetical record label. Id. 
]] 175-176. We concur with Professor Crawford's decision not to attempt 
to assign any promotional value to Music Choice's service in the non-
PSS market. The evidence he cited to support such an effect is either 
dated (i.e., from a 1998 CARP decision) or anecdotal (i.e., record 
labels provide Music Choice with ``promotional copies'' of new singles 
or albums). Id. ]] 97-104. The Judges do not doubt that record labels 
seek exposure for the artists they promote, and digital platforms like 
Music Choice may provide meaningful exposure to the artists that appear 
on its PSS service. The Judges find no evidence in the record in this 
proceeding that they can use to quantify what impact, if any, 
promotional activities on Music Choice's platform would have on artists 
(and the labels that sign them) in non-PSS markets.
    The Judges are less sanguine, however, about Professor Crawford's 
assignment of a zero threat point to the

[[Page 65217]]

first portion of a record label's threat point (i.e., that dealing with 
the PSS market). It is not at all clear that a record label's failure 
to reach an agreement with Music Choice would mean a loss of all record 
company profits in the PSS market if that market includes all providers 
of residential audio services. There is evidence in the record that at 
least one Music Choice competitor, Stingray Music, provides a service 
that is comparable to the residential audio service that Music Choice 
provides, but pays a much higher royalty rate than Music Choice 
pays.\36\ Although that competitor, which is a recent entrant to the 
U.S. market, has not sought a royalty rate closer to that which Music 
Choice pays, it certainly could in the future, perhaps using the lower 
rate paid by Music Choice as a comparable to support its own rate 
reduction. In other words, the lower rate that Music Choice pays as a 
PSS could put downward pressure on the rates that competing services 
pay to record labels.
---------------------------------------------------------------------------

    \36\ Stingray Music is a Canadian digital pay television audio 
service owned and operated by Stingray Digital. It has about 50 
music channels that are available to television service subscribers 
of several cable and IPTV providers in the U.S. Like Music Choice, 
Stingray also has a business service and streams to individuals who 
subscribe to television services that provide Stingray Music. Wazzan 
WDT ] 62. The PSS and services such as Stingray, which SoundExchange 
refers to as CABSAT (cable/satellite) services compete for the same 
MVPD wholesale buyers. Stingray bought Music Choice's European 
affiliate, which it operates as Music Choice International. In the 
U.S., Music Choice and Stingray are direct competitors. Id. ] 62(g), 
(h).
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    By contrast, if Music Choice and the theoretical record label were 
unable to reach an agreement, the rate that Music Choice pays could no 
longer be used by providers of comparable services to justify lower 
royalty rates. Under that scenario, a record label could actually 
benefit from the loss of Music Choice to the extent that the rate it 
pays could be shown to be below a market rate, which would result in a 
positive threat point for the record label.\37\ As with the asserted 
promotional effect, however, such an effect is impossible to estimate 
with any accuracy. The Judges do not conclude from this discussion that 
zero is the correct threat point for the hypothetical record label but 
rather confirm the lack of usefulness of the Crawford model because 
critical components of the model, at least as presented by Dr. Crawford 
in the current proceeding, allow a broad level of discretion and 
subjectivity, which undermines the credibility of the results.
--------------------------------------------------------