Determination of Royalty Rates and Terms for Making and Distributing Phonorecords (Phonorecords III), 1918-2036 [2019-00249]

Agencies

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

[Federal Register Volume 84, Number 24 (Tuesday, February 5, 2019)]
[Rules and Regulations]
[Pages 1918-2036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-00249]



[[Page 1917]]

Vol. 84

Tuesday,

No. 24

February 5, 2019

Part III





Library of Congress





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Copyright Royalty Board





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37 CFR Part 385





Determination of Royalty Rates and Terms for Making and Distributing 
Phonorecords (Phonorecords III); Final Rule

Federal Register / Vol. 84 , No. 24 / Tuesday, February 5, 2019 / 
Rules and Regulations

[[Page 1918]]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 385

[Docket No. 16-CRB-0003-PR (2018-2022)]


Determination of Royalty Rates and Terms for Making and 
Distributing Phonorecords (Phonorecords 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 making and distributing 
phonorecords for the period beginning January 1, 2018, and ending on 
December 31, 2022.

DATES: 
    Effective Date: February 5, 2019.
    Applicability Date: The regulations apply to the license period 
beginning January 1, 2018, and ending December 31, 2022.

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-0003-PR (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:

Final Determination

    The Copyright Royalty Judges (Judges) commenced the captioned 
proceeding to set royalty rates and terms to license the copyrights of 
songwriters and publishers in musical works made and distributed as 
physical phonorecords, digital downloads, and on-demand digital 
streams. See 81 FR 255 (Jan. 5, 2016). The rates and terms determined 
herein shall be effective during the rate period January 1, 2018, 
through December 31, 2022. Under the Copyright Act, royalty rates for 
uses of musical works shall end ``on the effective date of successor 
rates and terms, or such other period as the parties may agree.'' 17 
U.S.C. 115(c)(3)); The Judges included the designation (2018-2022) in 
the docket number for this proceeding for the purpose of designating 
the relevant five-year period with the knowledge that affected parties 
may agree to successor rates and terms for a different or additional 
period. In this proceeding, each party included in its Proposed 
Findings of Fact (PFF) and Proposed Conclusions of Law (PCL) a 
designation of the rate period as January 1, 2018, through December 31, 
2022. The Judges, therefore, adopt that agreed rate period.
    For the reasons detailed in this Determination,\1\ the Judges 
establish the following section 115 royalty rate structure, and rates, 
for the period 2018 through 2022.
    For licensing of musical works for all service offerings, the all-
in rate for performances and mechanical reproductions shall be the 
greater of the percent of service revenue and Total Content Cost (TCC) 
rates in the following table.


                                         2018-2022 All-In Royalty Rates
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                                       2018            2019            2020            2021            2022
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Percent of Revenue..............            11.4            12.3            13.3            14.2            15.1
Percent of TCC..................            22.0            23.1            24.1            25.2            26.2
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    The Judges also adopt for the new rate period existing royalty 
floors in effect for certain streaming configurations.
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    \1\ This rate determination is not unanimous. Judge Strickler 
prepared, to a disproportionately large degree, the initial drafts 
of this Determination. Notwithstanding the Judges' concurrence on 
most of the factual recitation and economic analysis, they were 
unable to reach consensus on their conclusions. Judge Strickler's 
dissenting opinion is appended to and is a part of this rate 
determination. Note that all redactions in this publication were 
made by the Copyright Royalty Judges and not by the Federal 
Register.
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    In the Initial Determination issued on January 27, 2018, the Judges 
promulgated regulatory terms that made changes in style and substance 
of the regulatory terms governing administration of the section 115 
licenses. In February 2018, the Judges received a motion from Copyright 
Owners (Owners' Motion) and a joint motion from four Services 
(Services' Motion) seeking clarification of regulatory terms 
promulgated with the Initial Determination.\2\ The Judges treated both 
motions as general motions governed by 37 CFR 350.4 and issued their 
ruling on the motions by separate Order dated October 29, 2018. The 
Judges incorporate the reasoning and rulings in that Order and to the 
extent necessary for clarity, include portions of that Order in this 
Final Determination. The final text of the amended regulations is set 
out below this SUPPLEMENTARY INFORMATION section.

I. Background
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    \2\ National Music Publishers' Association and Nashville 
Songwriters Association International together filed the Copyright 
Owners' Motion for Clarification or Correction . . . (Owners' 
Motion). Amazon Digital Services, LLC; Google Inc.; Pandora Media, 
Inc. and Spotify USA Inc. filed a Joint Motion for Rehearing to 
Clarify the Regulations (Services' Motion). The Judges did not treat 
the motions as motions for rehearing under 17 U.S.C. 803(c)(2), as 
neither requested a literal rehearing of evidence or legal argument.
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A. Statute and Regulations

    The Copyright Act (Act) establishes a compulsory license for use of 
musical works in the making and distribution of phonorecords. 17 U.S.C. 
115. For purposes of section 115, phonorecords include physical and 
digital sound recordings embodying the protected musical works, digital 
sound recordings that may be downloaded or streamed on demand by a 
listener, and downloaded telephone ringtones. Entities offering bundled 
music services and digital music lockers are also permitted to do so 
under the section 115 compulsory license.
    The section 115 compulsory license created in 1909, reflected 
Congress's attempt to balance the exclusive rights of owners of 
copyrighted musical works with the public's interest in access to the 
protected works. However, Congress made that right subject to a 
compulsory license because of concern about monopolistic control of the 
piano roll market (and another burgeoning invention, phonorecords). 17 
U.S.C. 1

[[Page 1919]]

(1909); see also H.R. Rep. No. 60-2222, at 9 (1909). This license is 
often referred to as the ``phonorecords'' license, but is also 
identified, synonymously, as the ``mechanical'' license.
    Congress revised the mechanical license in its 1976 general 
revision of the copyright laws. The 1976 revision also created a new 
entity, the Copyright Royalty Tribunal (CRT), to conduct periodic 
proceedings to adjust the royalty rate for the license.\3\
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    \3\ In 1993, Congress abolished the CRT and replaced it with 
copyright arbitration royalty panels (CARPs). Copyright Royalty 
Tribunal Reform Act of 1993, Public Law 103-198, 107 Stat. 2304. In 
2004, Congress abolished the CARP system and replaced it with the 
Copyright Royalty Judges. Copyright Royalty and Distribution Reform 
Act of 2004, Public Law 108-419, 118 Stat. 2341.
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    In 1995, Congress passed the Digital Performance Right in Sound 
Recordings Act (DPRA),\4\ extending the mechanical license to ``digital 
phonorecord deliveries'' (DPDs), which Congress defined as each 
individual delivery of a phonorecord by digital transmission of a sound 
recording which results in a specifically identifiable reproduction by 
or for any transmission recipient of a phonorecord of that sound 
recording, regardless of whether the digital transmission is also a 
public performance of the sound recording or any nondramatic musical 
work embodied therein. 17 U.S.C. 115(d). Accordingly, the section 115 
mechanical license now covers DPDs, in addition to physical copies.
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    \4\ Public Law 104-39, 109 Stat. 336.
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    By statute, the Judges commence a proceeding to determine royalty 
rates and terms for the section 115 license every fifth year. See 17 
U.S.C. 803(b)(1)(A)(i)(V). The Act favors negotiated settlements among 
interested parties, but in absence of a settlement, the Judges must 
determine ``reasonable rates and terms of royalty payments. . . .'' The 
Judges must further set rates that comport with the itemized statutory 
policy considerations described in section 801(b)(1) of the Act. Rates 
and terms for the mechanical license are codified in chapter III, part 
385, title 37, Code of Federal Regulations.
    As currently configured, the applicable regulations are divided 
into three subparts.\5\ Subpart A regulations govern licenses for 
reproductions of musical works (1) in physical form (vinyl albums, 
compact discs, and other physical recordings), (2) in digital form when 
the consumer purchases a permanent digital copy (download) of the 
phonorecord (PDD), and (3) inclusion of a musical work in a purchased 
telephone ringtone. Subpart B regulations include licenses for (1) 
interactive streaming and limited downloads. The regulations in subpart 
C relate to limited offerings, mixed bundles, music bundles, paid 
locker services, and purchased content locker services. The current 
regulations resulted from a negotiated settlement of the previous 
mechanical license proceeding.
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    \5\ For clarity, references to the regulations applicable to the 
sec. 115 license are to the regulations as configured before 
conclusion of the present proceeding. The Judges discuss appropriate 
regulatory changes in section VII of this determination.
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B. Prior Proceedings

    Until 1976, Congress legislated royalty rates for the mechanical 
reproduction of musical works and notes. In 1980, the CRT conducted the 
first contested proceeding to set rates for the section 115 compulsory 
license. The CRT increased the then-existing rate by more than 45%, 
from the statutory 2.75[cent] rate per phonorecord to 4[cent] per 
phonorecord. 45 FR 63 (Jan. 2, 1980).\6\ By 1986, the CRT had increased 
the mechanical rate to the greater of 5[cent] per musical work or 
.95[cent] per minute of playing time or fraction thereof. 46 FR 66267 
(Dec. 23, 1981); see 37 CFR 255.3(a)-(c). The next adjustment of the 
section 115 rates was scheduled to begin in 1987. However, the parties 
entered into a settlement setting the rate at 5.25[cent] per track 
beginning on January 1, 1988, and the CRT established a schedule of 
rate increases generally based on positive limited percentage changes 
in the Consumer Price Index every two years over the following 10 
years. See 52 FR 22637 (June 15, 1987). The rate increased until 1996, 
when the rate was set at 6.95[cent] per track or 1.3[cent] per minute 
of playing time or fraction thereof. See 37 CFR 255.3(d)-(h).
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    \6\ The United States Court of Appeals for the District of 
Columbia Circuit affirmed the CRT. Recording Industry Ass'n. of 
America v. Copyright Royalty Tribunal, 662 F.2d 1 (D.C. Cir. 1981) 
(1981 Phonorecords Appeal) (remanded on other grounds).
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    The rates set by the 1987 settlement were to expire on December 31, 
1997. The Librarian of Congress announced a negotiation period for 
copyright owners and users of the section 115 license in late 1996. The 
parties reached a settlement regarding rates for another ten-year 
period to end in 2008.\7\ Under the settlement, ultimately adopted by 
the Librarian, the parties agreed to a rate for physical phonorecords 
of 7.1[cent] per track and established a schedule for fixed rate 
increases every two years for a 10-year period. At the beginning of 
January 2006, the mechanical rate was the larger of 9.1[cent] per track 
or 1.75[cent] per minute of playing time or fraction thereof. See 37 
CFR 255.3(i)-(m); see also 63 FR 7288 (Feb. 13, 1998).
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    \7\ The Librarian initiated the 1996 proceeding during the CARP 
period, when controversies regarding royalty rates and terms were 
referred to privately retained arbitrators.
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    In 2006, with expiration of the previous settlement term nearing, 
the Judges commenced a proceeding to adjust the mechanical rates under 
section 115. On January 26, 2009, they issued a Determination, 
effective March 1, 2009. In that Determination, the Judges noted that 
the parties had settled their dispute regarding rates and terms for 
conditional downloads, interactive streaming, and incidental digital 
phonorecord deliveries (i.e., rates in the new subpart B) (2008 
Settlement). See Mechanical and Digital Phonorecord Delivery Rate 
Determination, 74 FR 4510, 4514 (Jan. 26, 2009) (Phonorecords I). The 
parties who negotiated the 2008 Settlement included the National Music 
Publishers Association (NMPA) and the Digital Music Association (DiMA), 
the trade association representing its member streaming services. 
Written Direct Testimony of Rishi Mirchandani, Trial Ex. 1, at ] 59 
(Mirchandani WDT).
    The 2008 Settlement rates that the Judges adopted maintained the 
existing rate and rate structure at the greater of 9.1[cent] per song 
or 1.75[cent] per minute of playing time (or fraction thereof) for 
physical phonorecords and permanent digital downloads (PDD). The Judges 
also adopted a license rate of 24[cent] per ringtone, a newly regulated 
product. 74 FR at 4515. Physical sales, PDDs, and ringtones were 
included in subpart A of the regulations.
    In 2011, the Judges commenced a proceeding to again determine 
section 115 royalty rates and terms. See 76 FR 590 (Jan. 5, 2011). The 
participants in that proceeding negotiated a settlement (2012 
Settlement) that carried forward the existing rates and added a new 
subpart C to the regulations to cover several newly regulated service 
offering categories, viz., limited offerings, mixed service bundles, 
music bundles, paid locker services, and purchased content locker 
services.\8\ The Judges adopted the participants' settlement in 2013. 
See Adjustment of Determination of Compulsory License Rates for 
Mechanical and Digital Phonorecords, 78 FR 67938 (Nov. 13, 2013) 
(Phonorecords II).
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    \8\ Once again, the parties to the negotiations included the 
NMPA and DiMA. Mirchandani WDT at ] 59.
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    The present section 115 proceeding is the third since the 
establishment of the Copyright Royalty Board (CRB) program

[[Page 1920]]

under the Copyright Royalty and Distribution Reform Act of 2004.\9\ In 
the Phonorecords II settlement, the parties agreed that any future rate 
determination presented to the Judges for subparts B and C service 
offering configurations would be a de novo rate determination. See 37 
CFR 385.17, 385.26 (2016).
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    \9\ Public Law 108-419, 118 Stat. 2341.
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C. Statement of the Case

    In response to the Judges' notice commencing the present 
proceeding, 21 entities filed Petitions to Participate.\10\ The 
participants engaged in negotiations and discovery. On June 15, 2016, 
some of the participants \11\ notified the Judges of a partial 
settlement with regard to rates and terms for physical phonorecords, 
PDDs, and ringtones, the service offerings covered by the extant 
regulations found in subpart A of part 385. The Judges published notice 
of the partial settlement \12\ and accepted and considered comments 
from interested parties.\13\
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    \10\ Initial Participants were: Amazon Digital Services, LLC 
(Amazon); Apple, Inc. (Apple); Broadcast Music, Inc. (BMI); American 
Society of Composers, Authors and Publishers (ASCAP); David Powell; 
Deezer S.A. (Deezer); Digital Media Association (DiMA); Gear 
Publishing Company (Gear); George Johnson d/b/a/GEO Music Group 
(GEO); Google, Inc. (Google); Music Reports, Inc. (MRI); Pandora 
Media, Inc. (Pandora); Recording Industry Association of America, 
Inc. (RIAA); Rhapsody International Inc.; SoundCloud Limited; 
Spotify USA Inc.; ``Copyright Owners'' comprised of National Music 
Publishers Association (NMPA), The Harry Fox Agency (HFA), Nashville 
Songwriters Association International (NSAI), Church Music 
Publishers Association (CMPA), Songwriters of North America (SONA), 
Omnifone Group Limited; and publishers filing jointly, Universal 
Music Group (UMG), Sony Music Entertainment (SME), Warner Music 
Group (WMG).
    \11\ The settling parties were: NMPA, NSAI, HFA, UMG, and WMG. 
As part of the settlement agreement, UMG and WMG withdrew from 
further participation in this proceeding.
    \12\ See 81 FR 48371 (Jul. 25, 2016).
    \13\ Three parties filed comments. American Association of 
Independent Music (A2IM), Sony Music Entertainment (SME), and George 
Johnson dba GEO Music Group (GEO). A2IM urged adoption of the 
settlement and SME approved of all but one provision of the 
settlement. GEO objected to the settlement.
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    On October 28, 2016, NMPA, Nashville Songwriters Association 
International (NSAI), and Sony Music Entertainment (SME) filed a Motion 
to Adopt Settlement Industry-Wide. The motion asserted that SME, NMPA, 
and NSAI had resolved the issue raised by SME in its response to the 
original notice. The Judges evaluated the remaining objection to the 
settlement filed by George Johnson dba GEO Music Group (GEO) and found 
that GEO had not established that the settlement agreement ``does not 
provide a reasonable basis for setting statutory rates and terms.'' See 
17 U.S.C. 801(b)(7)(A)(iii). As a part of the second settlement, SME 
withdrew from this proceeding. The Judges published the agreed subpart 
A regulations as a Final Rule on March 28, 2017.\14\
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    \14\ See 82 FR 15297 (Mar. 28, 2017).
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    During the course of the present proceeding, the Judges dismissed 
some participants and other participants withdrew. Remaining 
participants at the time of the hearing were NMPA and NSAI, 
representing songwriter and publisher copyright owners (Copyright 
Owners) and GEO, a songwriter/publisher/copyright owner, appearing pro 
se. Copyright licensees appearing at the hearing were Amazon Digital 
Services, LLC (Amazon), Apple Inc. (Apple), Google, Inc. (Google), 
Pandora Media, Inc. (Pandora), and Spotify USA Inc. (Spotify), 
(collectively, the Services).
    Beginning on March 8, 2017, the Judges conducted a hearing that 
concluded on April 13, 2017. During the course of the hearing, the 
Judges heard oral testimony from 37 witnesses.\15\ The Judges admitted 
over 1,100 exhibits, exclusive of demonstrative or illustrative 
materials the participants offered to explicate oral testimony. The 
participants submitted Proposed Findings of Fact (PFF) and Proposed 
Conclusions of Law (PCL) on May 12, 2017, and Replies to those filings 
on May 26, 2017. Under 37 CFR 351.4(b)(3), a participant may amend its 
rate proposal at any time up to and including the time it files 
proposed findings and conclusions. In this proceeding, Copyright Owners 
and Google filed amended rate proposals contemporaneously with their 
respective PFF and PCL. The parties delivered closing arguments on June 
7, 2017.
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    \15\ By stipulation of the participants, the Judges also 
accepted and considered written testimony from six additional 
witnesses who did not appear. Amazon designated and other 
participants counter-designated testimony from the Phonorecords I 
proceeding, which was admitted as Exhibits 321 and 322.
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    Based on the record of this proceeding, the Judges have determined 
that the mechanical license rate shall be an All-In rate derived from a 
Greater-Of rate structure. Weighing the advantages and disadvantages 
highlighted by the participants in this proceeding, the Judges conclude 
that a rate that balances a percent-of-service revenue with a percent-
of-TCC (total cost of content) shall be the basis for the All-In 
phonorecords royalty. The mechanical portion of the royalty shall be 
the greater of those figures, less the actual amount services pay for 
the phonorecord performance right. The Judges have no role in setting 
the performance right license rates. Further, performance right 
licensees pay the performance royalties to music publishers and 
songwriters. Services pay mechanical royalties primarily to music 
publishers.

II. Context of This Proceeding

A. Changes in Music Consumption Patterns and Revenue Allocation

    In recent years, music consumption patterns have undergone profound 
shifts--first from purchases of physical albums to downloads of digital 
singles, and then from downloads to on-demand access through digital 
streaming services. These shifts in music consumption patterns have led 
to corresponding changes in the magnitude and relative mix of income 
streams to copyright owners; in particular, copyright owners note an 
increased reliance on performance royalties as compared to reproduction 
and distribution royalties. Witness Statement of David M. Israelite, 
Trial Ex. 3014, ] 63 (Israelite WDT).
    While earlier format changes (piano rolls to wax cylinders to 
lacquer or vinyl discs to CDs) had altered the way households consumed 
music, they did not fundamentally alter the distribution of music. For 
all these music formats, copyright owners distributed music to 
consumers physically, either directly or through record stores. In 
addition, with the exception of ``singles,'' after conversion to the 
vinyl format, purveyors of music typically distributed a bundle of 
songs (an album). Witness Statement of Bart Herbison, Trial Ex. 3015, ] 
20 (Herbison WDT).
    By the early 2000s, digital data compression and higher-bandwidth 
internet connections allowed relatively fast transmission of recorded 
music files over the internet, drastically altering the distribution 
and consumption of music. Music services \16\ began to offer individual 
tracks or songs online as ``digital downloads.'' In 2008, approximately 
435 million albums were sold in the U.S. (both digital and physical). 
By 2015, that number fell to 249 million.\17\ Sales of singles, by

[[Page 1921]]

contrast, have remained fairly stable over the same period, averaging 
approximately one billion per year from 2008 to 2015 (with a peak of 
1.4 billion in 2012). Expert Report of Jeffrey A. Eisenach, Trial Ex. 
3027, at ] 67 & Table 4 (Eisenach WDT).
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    \16\ Digital download sales gained popularity in 2003 when Apple 
introduced the iTunes Music Store. The iTunes Store provided a 
convenient way for iTunes users to purchase a song or an entire 
album, legally, with a single click of the computer mouse. The 
iTunes Store also allowed users of Apple's iPod to sync songs 
directly to the device. Expert Report of Jui Ramaprasad, Trial Ex. 
1615, at 25-26 (Ramaprasad WDT). Prior to the launch of the iTunes 
Music Store, virtually all music was sold as albums. Eisenach WDT at 
44, n.58.
    \17\ Some evidence in the record suggests, however, that since 
2013, with the inclusion of ``streaming equivalent'' albums, overall 
album consumption may have increased. See Katz WDT at 42.
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    Changes in consumption patterns have had an impact on industry 
revenues. For example, between 2004 and 2015, record label revenues 
from physical sales declined from $15.3 billion to $2 billion, while 
digital revenues increased from $230 million to about $4.8 billion. Id. 
at ] 44. In 2004, over 98% of music industry revenue was the result of 
physical sales. Copyright and the Music Marketplace: A Report of the 
Register of Copyrights 70 (Feb. 2015) (Register's Report), citing RIAA-
sourced chart.\18\ Digital downloads made up most of the remaining 
revenue. Id. By 2013, revenues from physical sales fell to 35% of 
industry total revenues.\19\ Digital downloads, which made up 1.5% of 
industry revenues in 2004, had climbed to 40% of industry revenues.
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    \18\ The Judges cite the Register's Report as a source of 
industry background, developed by the Register of Copyrights 
following public hearings held nationwide in 2013 and 2014. The 
Judges do not base their conclusions in this Determination on any 
background information from the Register's Report that the parties 
did not also present as evidence in this proceeding.
    \19\ Industry total revenues in this analysis include digital 
downloads (40%), physical sales (35%), subscription and streaming 
(21%), and ringtones and ringbacks (1%). Copyright and the Music 
Marketplace at 70, citing RIAA-sourced chart.
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    Changes in music consumption patterns have coincided with an 
increase in the use of musical works. Review of relevant market factors 
imply, however, that the ways in which those works are used currently 
do not compensate copyright owners as well as they did in the past. See 
Register's Report at 72-74.\20\
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    \20\ Musical works copyright owners complain that streaming 
services are at least partially responsible for the paucity of 
revenues that the musical works generate for writers and publishers. 
They blame streaming services' business practices that favor growth 
in user base and market share over maximizing profitability. Digital 
services counter that they pay a substantial portion of the revenues 
they receive to license copyrighted works and compete with 
terrestrial radio, which is exempt from paying performance 
royalties. Digital services and broadcasters also argue that the 
lack of royalty compensation that makes its way to content creators 
is due in large part to the content creators' agreements with 
intermediaries, which, they argue, keep a large portion of royalties 
earned by content creators for their own account or to recoup 
advances. Id. at 76-77.
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B. Emergence of New Streaming Services

    Many diverse enterprises have launched music streaming services to 
meet growing consumer demand for streaming. Currently, there are at 
least 31 music streaming services available from 20 identifiable 
providers. Some of the well-known of these include: Amazon, Apple, 
Google (and its recently acquired YouTube), Deezer (partnered with 
Cricket/AT&T), iHeartRadio, Napster, Pandora, SoundCloud, Spotify, and 
Tidal (partnered with Sprint). Written Rebuttal Testimony of Jim 
Timmins, Trial Ex. 3036, ] 20 (Timmins WRT). Most of the companies 
entering the on-demand streaming music market have done so recently. 
Id. ] 21. In the last five years, new entrants to the market have 
initiated at least five interactive streaming services, joining Spotify 
which launched in the United States in 2011. See id. ] 22.
    The largest players in the interactive streaming market by song 
catalog are Apple Music, Google Play, and Spotify, each of which each 
has a catalog that exceeds [REDACTED] million songs. Tidal, which 
provides an outlet for unsigned artists,\21\ has a catalog of over 40 
million songs. See Written Direct Testimony of Michael L. Katz, Trial 
Ex. 885, ] 34, Table 1 (Katz WDT). By one estimate, in 2016 there were 
18 million U.S. on-demand subscribers: Spotify accounted for [REDACTED] 
million, followed by Apple Music (4 million), Rhapsody and Tidal (2 
million each) and all others accounting for the remaining 4 million. 
See id.
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    \21\ An ``unsigned artist'' is one recording music but not under 
contract to a recording company.
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    Some of the services that offer music streaming are pure-play music 
providers, such as Spotify and Pandora.\22\ Others, such as Amazon, 
Apple Music, and Google Play Music, are part of wider economic 
``ecosystems,'' in which a music service is one part of a multi-
product, multi-service aggregation of activities, including some that 
are also related to the provision of a retail distribution channel for 
music. For example, Amazon is a multi-faceted internet retail business. 
Amazon offers a buyers' program for an annual fee (Amazon Prime) that 
affords loyalty benefits to members, such as free or reduced rate 
shipping or faster delivery on the products members purchase. Amazon 
Prime reportedly has approximately [REDACTED] subscribers.\23\ For its 
music service offering, Amazon bundles interactive streaming at no 
additional cost with its Prime membership. In addition to the Prime 
Music service offering, Amazon's U.S.-based business also includes a 
physical music store, a digital download store, a purchased content 
locker service, Amazon Music Unlimited (a full-catalog subscription 
music service), and Amazon Music Unlimited for Echo (a full-catalog 
subscription service available through a single Wi-Fi enabled device, 
Amazon Echo).\24\ In launching Prime Music, Amazon relied on the 
section 115 license as it did for Amazon Music Unlimited and Amazon 
Music Unlimited for Echo.\25\
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    \22\ Until late 2016, Pandora operated as a noninteractive 
streaming service that, did not incur a compulsory license fee for 
mechanical royalties. Pandora recently began offering more 
interactive features, including a full on-demand tier. Pandora WDS 
Introductory Memo at 1-2; Written Direct Testimony of Christopher 
Phillips, Trial Ex. 877, at 8 (Phillips WDT).
    \23\ Amazon Prime is a $99-per-year service that offers Amazon 
customers access to a bundle of services including free two-day 
shipping, video streaming, photo storage and e-books, in addition to 
Prime Music. Expert Report of Glenn Hubbard, Trial Ex. 22, at 15 
(Hubbard WDT).
    \24\ Mirchandani WDT at 5.
    \25\ 3/15/17 Tr. 1315-16 (Mirchandani).
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    Google describes its ``Google Play'' offerings as its ``one-stop-
shop'' for the purchase of Android applications. The Google Play Store 
allows users to browse, purchase, and download content, including 
music. Google Play Music is Google Play's entire suite of music service 
offerings. Google Play Music, launched in 2011, is bundled with the 
YouTube Red video service subscription.\26\ It includes several 
functionalities: (1) A Music Store; (2) a cloud-based locker service; 
(3) an on-demand digital music streaming service; and (4) a section 114 
compliant non-interactive digital radio service (in the U.S.).\27\ 
Levine WDT, Trial Ex. 692, ] 43.
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    \26\ Google's experience with music licensing dates at least far 
back as 2006, when it acquired YouTube. Written Direct Testimony of 
Zahavah Levine, Trial Ex. 692, at 3 (Levine WDT). Google's music 
services were part of Google's Android Division but were recently 
combined within the YouTube business unit. Id. at 3-4.
    \27\ Section 114 of the Act includes requirements for the 
compulsory license to perform digitally sound recordings over 
noninteractive internet music streaming services.
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    The evidence is conflicting regarding whether the market for 
streaming services is faring poorly financially or performing about the 
same as other emerging industries. See, e.g., Timmins WRT, Trial Ex. 
3036, ]] 16-17; Levine WDT ] 16 (``streaming music services generally 
remain unprofitable businesses'' with content acquisition costs being 
``the biggest barrier to profitability.'') For example, Spotify, one of 
the largest pure-play streaming services, has reportedly [REDACTED]. 
Katz WDS at ] 65. Some estimates place

[[Page 1922]]

Spotify's market value at more than $8 billion, suggesting perhaps, 
investors' expectations regarding future profits. Written Rebuttal 
Testimony of Marc Rysman, Trial Ex. 3032, ] 11, n.3 (Rysman WRT).\28\ 
Spotify forecasts being profitable in [REDACTED]. Id. at ] 65 n.80.
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    \28\ In 2016, Spotify had over [REDACTED] million monthly active 
users, [REDACTED]% of which were in the U.S. [REDACTED] million of 
those U.S. users were also Premium subscribers. Written Direct 
Testimony of Barry McCarthy, Trial Ex. 1060, ] 2 (McCarthy WDT).
---------------------------------------------------------------------------

C. Effects of Streaming on Publishers' and Songwriters' Earnings

    Although many songwriters perform their own musical works, it is 
also common for songwriters to compose songs to be performed by others. 
Songwriters typically enter into contractual arrangements with music 
publishers, which promote and license the songwriters' works and 
collect royalties on their behalf. Music publishers and songwriters 
negotiate a split of the royalty payments. In some cases, songwriters 
are commissioned to write a song and are compensated with a flat fee 
for the work in exchange for giving up ownership rights to the song and 
any royalties it might earn.
    The four largest publishers--Sony/ATV, Warner/Chappell, Universal 
Music Publishing Group, and Kobalt Music Publishing--collectively 
accounted for just over 73 percent of the top 100 radio songs tracked 
by Billboard \29\ as of the second quarter in 2016. In addition, there 
are several other significant publishers, including BMG and Songs Music 
Publishing, and many thousands of smaller music publishers and self-
publishing songwriters. See Katz WDT ] 46.
---------------------------------------------------------------------------

    \29\ This Billboard measure tracks songs played on AM-FM 
terrestrial radio broadcasters, which are not required to license 
the works or the sound recordings they play.
---------------------------------------------------------------------------

    Songwriters have three primary sources of ongoing royalty income, 
which they generally share with music publishers: Mechanical royalties, 
synchronization (``synch'') royalties for use of their works in 
conjunction with video or film, and performance royalties.\30\ See Katz 
WDT ] 41; Copyright and the Music Marketplace at 69. Songwriters who 
are also recording artists receive a share of revenues from their 
record labels for the fixing of the musical work in a sound recording. 
Sound recording royalties include those from the sale of physical and 
digital albums and singles, sound recording synchronization, and 
digital performances. Id. Recording artists can also derive income from 
live performances, sale of merchandise, and other sources. Id. at 69-
70.
---------------------------------------------------------------------------

    \30\ Another revenue source is folio licenses, lyrics, and 
musical notations in written form. See Katz WDT ] 31.
---------------------------------------------------------------------------

    The shift in consumption from physical sales to streaming coincided 
with a reallocation of publisher revenue sources. In 2012, 30% of U.S. 
music publisher revenues came from performance royalties and 36% from 
mechanical royalties, with the rest coming from synch royalties and 
other sources. See Register's Report at 70. By 2014, 52% of music 
publisher revenues came from performance royalties \31\ while 23% came 
from musical works mechanical royalties, with the remainder coming from 
synchronization royalties and other sources. Id at 71, n.344, citing 
NMPA press release. By one estimate, mechanical license revenues from 
interactive streaming services accounted for only [REDACTED] percent of 
total music publishing revenues in 2015. Katz WDT ] 42.\32\
---------------------------------------------------------------------------

    \31\ Performance royalties are administered primarily by 
Performing Rights Organizations acting as collectives and 
clearinghouses for songwriters and publishers as licensors, and 
broadcasters and streaming services as licensees.
    \32\ It is noteworthy that the shift from mechanical royalties 
to performance royalties coincides with the shift from sales of 
physical phonorecords (e.g., CDs) and downloads, for which no 
performance royalty is required, to the use of interactive 
streaming, which pays both a mechanical royalty (when a DPD results) 
and a performance royalty, and to the use of noninteractive 
streaming, which historically pays only a performance royalty but no 
mechanical royalty.
---------------------------------------------------------------------------

    Evidence in the present record indicates that total publishing 
revenue declined by [REDACTED] percent between 2013 and 2014, but 
increased by [REDACTED] percent between 2014 and 2015. See Katz WDT ] 
58. Large publishers, such as Sony/ATV, UMPG, and Warner Chappell, were 
[REDACTED] in 2015, earning a combined $[REDACTED] million from U.S. 
publishing operations for that year. Id. ] 59.

III. The Present Rate Structure and Rates

    Subpart B of the current regulations contains mechanical royalty 
rates payable for the delivery and offering of interactive streams and/
or limited downloads. There are three product distinctions within the 
subpart B rate structure:

 Portable vs. Nonportable Services
 Bundled vs. Unbundled Services
 Subscription vs. Ad-Supported Services
37 CFR 385.13. The regulations also separate certain promotional uses 
for separate treatment, setting the rate for those promotional uses at 
zero.

    Each of these offering characteristics can be combined 
independently with almost every other characteristic, resulting in a 
very complex web of rate calculations. In the 2012 Settlement, the 
parties structured rate calculations for both subpart B and subpart C 
into three arithmetic segments.
    In the first step of the calculation, the parties determine the 
All-In royalty pool; that is, the royalty that would be payable based 
on a formula balancing the greater of a percent-of-service revenue and 
a percentage of one of two other expense measures. One expense measure 
if a percent-of-royalties services pay to record companies for sound 
recording performance rights, differing depending upon whether the 
sound recording licenses are pass-through or not pass-through. For 
certain subscription services, the percent-of service revenue is 
balanced against the lesser of two or three other potential 
mathematical outcomes.\33\
---------------------------------------------------------------------------

    \33\ The lesser-of prongs include a per-subscriber per month 
prong and percent-of-service payments for sound recording royalties, 
differing depending upon whether the sound recording licenses are 
pass-through or not pass-through.
---------------------------------------------------------------------------

    The second calculation reduces the All-In royalty pool to the 
``payable'' royalty pool in a two-step process. First the parties 
subtract royalties the services pay for musical works performance 
rights from the All-In royalty established in the first calculation. 
This remainder is considered the payable royalty pool for certain 
service offerings; viz., non-subscription, ad-supported, purchased 
content lockers, mixed service bundles, and music bundles. For 
subscription service offerings, whether standalone or bundled, and 
depending upon whether the offering is portable or non-portable, 
streaming only or mixed use, determining the payable royalty pool 
requires a balancing of the mechanical remainder against a set rate for 
``qualified'' subscribers per month to determine the greater-of result. 
The set rate for qualified subscribers differs for each variation of 
subscription offering.
    The final step in the rate determination for each service offering 
is an allocation among licensors based upon the number of plays from 
each licensor's catalog.\34\
---------------------------------------------------------------------------

    \34\ Calculation of royalties for paid locker services varies 
slightly from this formula, but the complexity is similar.
---------------------------------------------------------------------------

    The Services, the licensor participants in the present proceeding, 
refer to this convoluted process as the establishment of royalty rates 
with ``minima.'' According to the Services, these minima are designed 
to protect copyright owners from the potential downside of Services' 
business models that might

[[Page 1923]]

minimize service revenue and thus manipulate the percent-of-service 
revenue rate standard. The Services, whose current royalty payments are 
determined under the minima prongs of the formulae, point to the minima 
as a reason to keep the percent-of-service revenue ``headline'' rate 
low, reasoning that the headline rate is not, or is rarely, binding in 
any event.
    Notwithstanding the parties' prior agreement to the apparent 
complexity, the alternative calculation methods, or the variations in 
the descriptions of the service offerings, evidence presented in this 
proceeding does not support continuing the fractionalization of the 
rate determination for the service offerings at issue. At the 
conclusion of the tortured rate calculations required by the present 
regulations, the evidence suggests that differences in the rates 
Services pay are not great enough to justify the complexity of the 
formulae. Some of the rate determination prongs are rarely if ever 
triggered. Despite the myriad configurations of rate calculations, some 
of the service offerings are incapable of categorization under the 
extant rate structure. Apple and Google entered the digital music 
delivery marketplace by negotiating direct licenses covering several 
compulsory licenses, avoiding the regulatory scheme entirely.

IV. Analysis of Rate Structure Proposals

A. Parties' Proposals

1. The Services (Excluding Apple and Google)
    The Services propose rates and rate structures that, while varying 
in their particulars, share a number of common elements. Broadly, the 
Services propose a rate structure that, in the main, continues the 
current rate structure. More particularly, the Services' proposals 
share core elements: (1) An ``All-In'' rate for mechanical and 
performance rights; (2) based upon a 10.5 percent-of-service revenue 
headline rate with minima; (3) without a ``Mechanical Floor.''
a. Amazon
    In its Proposed Rates and Terms (Amazon Proposal), Amazon proposes 
that the rate structure as currently in the applicable regulations 
rollover into the 2018-22 rate period, except: (1) The per subscriber 
minimum and/or subscriber-based royalty floors for a ``family account'' 
should equal 150% of the per subscriber minimum and/or subscriber-based 
royalty floor for an individual account; (2) a student subscription 
account discount of 50% should be included in the regulations to the 
per subscriber minimum and subscriber-based royalty floor that would 
otherwise apply under the current regulations; (3) a discount for 
annual subscriptions equal to 16.67% of the minimum royalty rate (or 
rates) and subscriber-based royalty floor (or floors) that would 
otherwise apply under Sec.  385.13; and (4) 15% discount to the minimum 
royalty rate (or rates) and subscriber-based royalty floor (or floors) 
to reflect a service's actual ``app store'' and carrier billing costs, 
not to exceed 15% for each. Amazon Proposal at 1-2.
b. Pandora
    Pandora's amended proposed rates and terms (Pandora Amended 
Proposal),\35\ seek the following changes from the current regulations: 
(1) Elimination of the ``Mechanical Floor;'' (2) elimination of the 
alternative computation of sub-minima I and II now in Sec.  385.13 and 
in Sec.  385.23 (for subparts B and C, respectively) ``in cases in 
which the record company is the section 115 licensee;'' (3) A 
broadening of the present ``not to exceed 15%'' reduction of ``Service 
Revenues'' in Sec.  385.11 to reflect, in toto, an exclusion of costs 
attributable to ``obtaining'' revenue, ``including [but not expressly 
limited to] credit card commissions, app store commissions, and similar 
payment process charges;'' \36\ and (4) a discount on minimum royalties 
for student plans ``not to exceed 50%'' off minimum royalty rates set 
forth in Sec.  385.13. Id. at 1, 7.
---------------------------------------------------------------------------

    \35\ The Pandora Amended Proposal superseded its original 
proposal filed on November 1, 2016, by adding definitions (for 
``fraudulent streams'' and ``play'') that do not directly relate to 
the royalty rates. See Pandora PFF/PCL, Appx. C.
    \36\ Pandora does not expressly describe this change as a change 
in rates per se.
---------------------------------------------------------------------------

c. Spotify
    In its amended proposed rates and terms, Spotify proposed the 
following changes from the current regulations: (1) Removal of the 
``Mechanical Floor'' for all licensed activity; and (2) a broadening of 
the present ``not to exceed 15%'' reduction of ``Service Revenues'' in 
Sec.  385.11 to reflect, in toto, an exclusion of the actual costs 
attributable to ``obtaining'' revenue, ``including [but not expressly 
limited to] credit card commissions, app store commissions similar 
payment process charges, and actual carrier billing cost.'' See Second 
Amended Proposed Rates and Terms of Spotify USA Inc., passim.
2. Apple
    Apple proposed that the Services pay $0.00091 for each 
nonfraudulent stream of a copyrighted musical work lasting 30 seconds 
or more. Apple Inc. Proposed Rates and Terms (as amended) at 3-4 (Apple 
Amended Proposal). Apple proposed defining a use as any play of a sound 
recording of a copyrighted work lasting 30 seconds or more. 
Additionally, Apple proposed an exemption for a ``fraudulent stream,'' 
which it defined as ``a stream that a service reasonably and in good-
faith determines to be fraudulent.'' Id. at 2. For paid locker 
services, Apple proposes a $0.17 per subscriber fee, also as a 
component of an All-In musical works royalty rate that would include 
the ``subpart C'' royalty. Id. at 7-8. For purchased content locker 
services, Apple proposed a zero royalty fee. Id. at 7.
3. Google
    In its amended proposed rates and terms (Google Amended 
Proposal),\37\ Google parts company with the other Services and 
proposes that the rate structure ``eliminat[e] . . . different service 
categories'' in both subparts B and C and replace them with ``a single, 
greater-of rate structure between 10.5% of net service revenue and an 
uncapped 15-percent TCC component.'' Google Amended Proposal at 1.\38\ 
That 15% TCC rate is reduced to 13% for pass-through licenses (i.e., 
where a record company is the licensee under section 115, and the 
record company has granted streaming rights to a service). Id. at 33-
34. Google's proposed rate does not include a ``Mechanical Floor.'' 
Similar to one of Amazon's proposals, Google also seeks a discount in 
rates for ``carrier billing costs'' and ``app store commissions,'' plus 
``credit card commissions'' and ``similar payment process charges,'' 
all not to exceed 15%. Id. at 6 (for subpart B); 26 (for subpart 
C).\39\ In addition, Google's proposal includes a zero rate for certain 
free trial periods. Id. at 35-37.
---------------------------------------------------------------------------

    \37\ The Google Amended Proposal amended its original proposal 
filed on November 1, 2016. Google originally proposed a subpart B 
rate structure that generally followed the existing structure. 
Google Written Direct Statement, Introductory Memorandum at 3 (Nov. 
1, 2016).
    \38\ ``TCC'' is an industry acronym for ``Total Content Cost'', 
a shorthand reference to the extant regulatory language describing 
generally the amount paid by a service to a record company for the 
section 114 right to perform digitally a sound recording. Google's 
proposed regulatory terms retain some of the distinctions in service 
offerings for purposes of computing per-work royalty allocations. 
See, e.g., id. at 29-31. This does not affect the total royalty 
charged to the service.
    \39\ Google describes this proposed change as a change in the 
definition of ``Service Revenue,'' unlike Amazon, which described 
its proposed 15% discount as a change in rates. The difference is 
mathematically irrelevant.

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

[[Page 1924]]

4. Copyright Owners (Excluding GEO)
    The Copyright Owners proposed that the Judges adopt a unitary rate 
structure for all interactive streaming and limited downloads that are 
currently covered by subparts B and C.\40\ Copyright Owners' Amended 
Proposed Rates and Terms, at 3 (May 11, 2017) (CO Amended Proposal). 
The Copyright Owners structured the proposal as the greater-of a usage 
charge and a per-user charge. Specifically, under the Copyright Owners' 
proposal, each month the licensee would pay the greater of (a) a per-
play fee ($0.0015) multiplied by the number of interactive streams or 
limited downloads during the month and (b) a per-end user \41\ fee 
($1.06) multiplied by the number of end users during the month. Id. at 
8. The license fee would be for mechanical rights only, and would not 
be offset by any performance royalties that the licensee paid for the 
same activity. Id.
---------------------------------------------------------------------------

    \40\ The Copyright Owners' rate proposal would apply the subpart 
A rates to so-called ``music bundles'' (``offerings of two or more 
subpart A products to end users as part of one transaction'') which 
are currently covered by subpart C. Id. at 3 nn. 2 & 4.
    \41\ The proposal would consider each paying subscriber to a 
service, or each active user, to be an ``end user.'' Id. at 8-9.
---------------------------------------------------------------------------

5. GEO Music Group
    The Judges accepted written and oral testimony from Mr. George 
Johnson dba GEO Music Group. Mr. Johnson appeared pro se. Mr. Johnson 
is a self-employed songwriter, music publisher, and performer, who 
formerly operated his own recording company.\42\ The other participants 
in the proceeding agreed to preserve objections to Mr. Johnson's 
testimony to avoid interruptions and to submit any objections in 
writing after his testimony.
---------------------------------------------------------------------------

    \42\ At the time of hearing in the present proceeding, Mr. 
Johnson had stepped back from his music business and was employed in 
real estate. See 3/9/17 Tr. 418-19 (Johnson).
---------------------------------------------------------------------------

    The crux of Mr. Johnson's case is that ``songs and copyrights have 
real intrinsic value in dollars'' and that current royalty rates do not 
fairly account for that value. Second Amended Written Direct Statement 
of George D. Johnson (GEO) for Proposed Subpart C or New Subpart D 
Rates and Terms at 3 (Johnson Second AWDS). Mr. Johnson proposes what 
he refers to as a ``Buy Button'' or ``Paid Permanent Digital Song 
Sale'' (PDS) under a newly created subpart C or subpart D of the 
applicable regulations. Id. at 2. Mr. Johnson contends that the PDS 
would ``eliminate the unpaid limited download in 37 CFR 385, Subparts B 
and C.'' Id. at 3. Under Mr. Johnson's proposal all ``interactive and 
non-interactive Subpart B and C streaming services'' would be required 
to include a ``buy button'' that ``allows customers to voluntarily buy 
or purchase a work as a permanent paid digital download.'' Sec.  385 
Regulation Redline and Changes of George D. Johnson (GEO) at 4 (Feb. 
20, 2017) (Johnson Redline and Changes). Mr. Johnson proposes that the 
cost to the consumer for these permanent paid digital song sales would 
be, for 2018: $1.00; 2019: $1.50; 2020: $2.00; 2021: $2.50; 2022: 
$3.00. Id.
    Mr. Johnson also proposes that proceeds from sales of permanent 
downloads purchased through the proposed ``buy button'' be allocated to 
the following groups of interested parties under one of two 
alternatives (A or B): Artist ($.19 or $.18 per dollar paid by the 
consumer), ``record'' (presumably the label or record company) ($.21 or 
$.20), ``AFM'' (presumably American Federation of Musicians) ($.01), 
``AFTRA'' (presumably American Federation of Television and Radio 
Artists) ($.01), Songwriter ($.21 or $.20), Publishers ($.21 or $.20), 
and Services ($.16 or $.20). Id. Mr. Johnson refers to the alternative 
allocations as royalties but they appear instead to be shares of sales 
proceeds that he would allocate to what he believes are all of the 
interested parties. He does not explain why or when alternative A 
should be applied as opposed to alternative B.
    The allocations he proposes would include royalties for the section 
112/114 licenses and the section 115 license, divided equally between 
the section 115 and section 114 copyright owners. Johnson Redline and 
Changes at 4. However, under his proposal the copyright users (the 
Services) would still pay a mechanical royalty for streaming 
performances of ``$.0015, etc.'' Johnson Second AWDS at 4. It is 
unclear what year the $.0015 rate would apply to and what the ``etc.'' 
means.\43\ In short, Mr. Johnson proposes two alternatives for 
allocating revenues from sales that might occur if a customer were to 
buy a song directly from a Service. Under Alternative A, the Services 
would effectively pay in the aggregate 84% of the PDS revenues to all 
copyright owners for licenses under both the section 114 (which 
includes section 112 royalties) and 115. Under Alternative B, the 
Services would pay 80% of PDS revenues for the same two licenses. 
Johnson Second AWDS at 4-5.
---------------------------------------------------------------------------

    \43\ In his oral testimony, Mr. Johnson appears to concede that 
if a customer purchased a song and paid whatever price he proposes 
that an additional streaming rate might not be necessary. 3/9/17 Tr. 
432: 14-17 (Johnson) (``my proposal is that if you paid up front . . 
. you might not need those Subpart B [streaming] rates.'').
---------------------------------------------------------------------------

    In his written direct statement Mr. Johnson does not propose any 
benchmark or other evidence that would justify a ``buy button'' 
requirement with a rate of 80% or 84% of PDS revenues. He does assert, 
however, that it is the ``only reasonable proposal that captures the 
true value of a music copyright today and historically.'' Johnson 
Second AWDS at 5. Ultimately, Mr. Johnson concedes that the Judges 
previously rejected his proposal to combine the section 112/114 and 115 
rates in Web IV and that the proposal continues to be impracticable. 3/
9/17 Tr. 433: 2-3, 11-12 (Johnson) (``that didn't happen in Web IV and 
. . . it won't happen here . . . it's so segmented, all the different 
licenses, it's probably impossible.'').
    While the Judges appreciate Mr. Johnson's participation in the 
proceeding, they must view his proposal through the prism of the 
Copyright Act. Nothing in section 115 would authorize the Judges to 
require all Services availing themselves of the section 115 license to 
include a mandatory ``buy button'' as part of any service offering. 
Services may install a ``buy button'' if they wish, but the Judges 
cannot mandate that service business innovation as Mr. Johnson 
proposes.
    Likewise, the Judges have no authority to set the price that 
Services charge consumers for purchasing a download whether from a PDD 
service offering or through Mr. Johnson's proposed buy button. Even if 
the Judges had the authority to impose a ``buy button'' requirement on 
the Services, it is unclear what purpose that button would serve other 
than to alert consumers to the possibility of buying a song they happen 
to stream. The Judges believe consumers of music are already aware that 
if they want to buy a song they can do so. Perhaps Mr. Johnson believes 
with a buy button, consumers might be more willing to click on the 
button and buy the song than if the button were not visible and readily 
available. Mr. Johnson provides no evidence to support that premise. As 
for the 80% or 84% combined royalty that Mr. Johnson proposes for the 
section 112/114 and 115 licenses, he provides no evidence upon which 
the Judges might base such a royalty other than his belief that it is 
the ``only reasonable proposal that captures the true value of a music 
copyright today and historically.'' See Johnson Second AWDS at 5. Mr. 
Johnson's opinion alone is insufficient evidence upon which to support 
his ``buy button'' proposal.
    Given the lack of sufficient substantial and persuasive evidence to 
support the

[[Page 1925]]

GEO proposal, the Judges will not further analyze it.\44\ The Judges 
respectfully decline to adopt Mr. Johnson's proposed approach to rate 
setting.
---------------------------------------------------------------------------

    \44\ Mr. Johnson's oral testimony went well beyond his ``buy 
button'' proposal and included criticism of the current Copyright 
Act as well as criticism of the Services' rate proposals and 
business models and other concerns about the music industry more 
generally. While the Judges considered Mr. Johnson's testimony in 
determining the appropriate royalty rates for the upcoming rate 
period, as a lay witness sponsored by no party other than himself 
the Judges placed little weight on his opinions regarding the 
various rate proposals of the Services and the condition of the 
industry. As for his criticism of the Copyright Act, those opinions 
are more appropriately directed to Congress.
---------------------------------------------------------------------------

B. Arguments Concerning Elements of the Proposed Rate Structures

1. Per-Unit Rate
    Copyright Owners and Apple emphasize that a per-play royalty rate 
structure, as compared with a percent-of-revenue structure, provides 
transparency and simplicity in reporting to songwriters and publishers, 
because it requires only one metric besides the rate itself, i.e., the 
number of plays, making it much easier to calculate, report, and 
understand. See, e.g., Expert Report of Marc Rysman, Trial Ex. 3026, ] 
56 (Rysman WDT); Wheeler WDT, Trial Ex. 1613, ] 19; Expert Report of 
Anindya Ghose, Trial Ex. 1617, ]] 83-84 (Ghose WDT); Expert Report of 
Jui Ramaprasad, Trial Ex. 1615, ] 41 (Ramaprasad WDT); Witness 
Statement of Peter Brodsky, Trial Ex. 3016, ] 76 (Brodsky WDT); 3/22/17 
Tr. 2476-78 (Dorn); 3/23/17 Tr. 2855-56 (Ghose). Relatedly, Copyright 
Owners argue that a transparent metric tied to actual usage is superior 
because, under the alternative percent-of-revenue approach, services 
might manipulate revenue through bundling, discounting, and accounting 
techniques, or might defer service revenues and emphasize increasing 
market share rather than profits. See Rysman WDT ]] 43-45.
    Copyright Owners and Apple contrast their proposed per play 
approaches with the current rate structure, which they characterize as 
cumbersome and convoluted. They emphasize that under the current rate 
structure, the Services must perform a series of different greater of 
and lesser of calculations, depending on a service's business model, to 
determine which prong of the rate structure is operative. See Copyright 
Owners' Proposed Findings of Fact (COPFF) (and record citation 
therein). Copyright Owners assert that because of this complexity, 
publishers and songwriters cannot easily verify the accuracy of data 
the Services input when calculating royalty payments. See Brodsky WDT ] 
76; Ghose WDT ]] 80, 81, 82; Ramaprasad ]] 4, 38, 42-44; Rysman WDT ] 
57; Tr. 2865 (Ghose); Tr. 824 (Joyce); Tr. 247778 (Dorn).
    Beyond the issue of complexity, Copyright Owners and Apple argue 
that interactive streaming services do not need the present upstream 
rate structure in order to adopt any particular downstream business 
model. Rather, Copyright Owners and Apple assert that a per-play 
structure would establish a level of equality in the royalty rates 
across the Services, without regard to business models. Songwriters and 
publishers would be paid on the same transparent, fixed amount without 
advantaging any one business model over another. 3/23/17 Tr. 2849, 2863 
(Ghose). Thus, Copyright Owners and Apple maintain that a royalty based 
on the number of plays aligns the compensation paid to the creators of 
the content with actual demand for and consumption of their content. 
Ghose WDT ] 84; Rysman WDT ]] 9, 58; Testimony of David Dorn, Trial Ex. 
1611, ] 33 (Dorn WDT).
    Copyright Owners further argue that the present rate structure's 
failure to measure royalties based on per-play consumption is 
counterintuitive, because it permits a decreasing effective per-play 
rate even as the quantity of songs listeners consume via interactive 
streaming is increasing. Israelite WDT ] 39. Copyright Owners note, for 
example, that listening to [REDACTED] increased from [REDACTED] streams 
in July 2014 to [REDACTED] streams in December 2016, a [REDACTED] 
increase in the number of streams. Rebuttal Report of Glenn Hubbard, 
Trial Exs. 132-33, Ex. 1 and ] 2.22 (Hubbard WRT); 4/13/17 Tr. 5971-72 
(Hubbard). However, contemporaneously [REDACTED]'s mechanical royalty 
payments to the Copyright Owners only increased [REDACTED], from 
$[REDACTED] in mechanical royalties in July 2014 to only $[REDACTED] in 
December 2016. Hubbard WRT ] 3.9; 4/13/17 Tr. 5971-73 (Hubbard). The 
upshot, Copyright Owners assert, is that, as streaming consumption 
increased dramatically from 2014 to 2016, the effective per stream 
mechanical royalties paid by [REDACTED] to Copyright Owners decreased 
from [REDACTED] per hundred streams in July 2014 to [REDACTED] per 
hundred streams in December 2016--only [REDACTED]% of the effective per 
stream rate in July 2014. 4/13/17 Tr. 5972-73 (Hubbard).
    The Services made four arguments in opposition to the use of a per-
play royalty rate. The overarching theme of these arguments is that an 
inflexible ``one size fits all'' rate structure would be ``bad for 
services, consumers, and the copyright owners alike.'' See Services' 
Joint Proposed Findings of Fact (SJPFF) at 89.
    First, the Services argued that an upstream per-play rate would not 
align with the downstream demand for ``all-you-can-eat'' streaming 
services. As Professor Marx testified, a per stream fee introduces a 
number of distortions and inefficiencies, encouraging a capping of 
downstream plays and reduces incentives for services to meet the demand 
of consumers ``who are going to stream a lot of music.'' Written Direct 
Testimony of Leslie Marx, Trial Ex. 1065, ]] 130-131 (Marx WDT). In 
this vein, Pandora's then-president, Michael Herring, noted that a per-
play consumption-based model where the revenue is fixed creates 
uncertainty and volatility, which discourage investment and hamper 
profitability. 3/14/17 Tr. 894-95 (Herring). Mr. Herring noted that 
this is a general economic problem that occurs when a retail 
subscription business has fixed subscription revenues per customer, but 
variable (and unpredictable) costs derived from variable (and 
unpredictable) downstream usage. Written Rebuttal Testimony of Michael 
Herring, Trial Ex. 888, at ] 17 (Herring WRT); 3/14/17 Tr. 894-98 
(Herring); see Mirchandani WDT ] 39 (one-size-fits-all rate is not 
``offering agnostic'' as Copyright Owners claim, but rather is 
``offering determinative.'').
    Second, the Services argued that there is no ``revealed 
preference'' in the marketplace for a per-play royalty rate structure 
for licensing musical works or sound recordings rights, as opposed to a 
percent-of-revenue (with minima) royalty structure. In particular, they 
contended that mechanical royalties have never been set on a per-play 
basis. See Herring WRT ] 19. The Services also pointed to the 
interactive services' direct licenses with music publishers, PROs and 
record companies, claiming that all rely on a percent-of-revenue 
royalty calculation. SJPFF ]] 174-175 (and record citations therein). 
They acknowledged that some of the direct license agreements with 
record companies contain alternative per-user prongs but they noted 
that this is consistent with the existing rate structure which already 
contains a per-subscriber minimum, but not a per-play prong. Id. ] 175. 
Further, the Services noted that Apple, which is proposing a per-play 
rate, in fact has [REDACTED]. See 3/23/17 Tr. 2857 (Ghose); 3/22/17 Tr. 
2479 (Dorn).

[[Page 1926]]

    Third, the Services discounted the argument that Copyright Owners' 
proposed rate structure is superior to the present rate structure 
because the latter is too complicated or cumbersome. They characterized 
this criticism as ``overblown'' and assert that any problems arising in 
the use of a revenue-based headline rate is mitigated by the inclusion 
of per subscriber and TCC minima. SJPFF ] 174. They further noted that 
section 801(b)(1) does not list as a criterion or objective that the 
rates be simple, easy to understand, or otherwise ``transparent.'' 
Services' Joint Reply to Apple PFF (SJR(Apple)) at 34, 36. Thus, they 
argued, the Judges cannot jettison an otherwise appropriate rate 
structure because some unquantified segment of the songwriting 
community might be uncertain as to how their royalties were computed.
    Separate from these four arguments against per-play rate proposals, 
the Services noted a practical problem related to Apple's specific 
proposal: Apple's proposal calls for deducting performance royalties 
from the per-play mechanical royalty, yet it does not explain how to 
convert the typical percent-of-revenue performance royalty into a per 
play rate in order to perform that computation.\45\ The Services noted 
that Apple Music's Senior Director, David Dorn, was unable to explain 
how this calculation would be made. See 3/22/17 Tr. 2508-09 (Dorn). 
Thus, the Services asserted that Apple's proposal would introduce 
``more complexity, not less,'' SJR (Apple) at 34.
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    \45\ This problem is irrelevant to Copyright Owners' proposal, 
because they propose the elimination of the All-In provision in the 
rate structure.
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2. Flexible Rate
    The Services propose a rate structure for configurations in extant 
subparts B and C that follows the structure in the existing regulations 
adopted after the 2012 Settlement.\46\ The Services asserted that they 
are not advocating preservation of the basics of the settlement rate 
structure merely to preserve the status quo. See 3/13/17 Tr. 564 
(Katz). Rather, the Services, through their economic experts, argue 
that the settlement rate structure as an appropriate benchmark for the 
Judges to weigh, consider, adjust (if appropriate), and apply or 
reject, as they would any proffered benchmark. The Services note that 
considering the current rate structure as a benchmark is instructive 
because it allows for identification of market value by analogy. The 
Services assert that examination of a comparable circumstance obviates 
the need for experts and the Judges to build a theoretical model from 
the ``ground up.'' See 3/13/17 Tr. 691-2 (Katz).
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    \46\ Except when it doesn't. The Services seek the elimination 
of the ``Mechanical Floor,'' a significant departure from the 
existing structure.
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    The Services' experts opine that, for a number of reasons, the 2012 
rate structure is a highly appropriate benchmark. First, they note that 
it applies to (1) the same rights; (2) the same uses; and (3) the same 
types of market participants. See 3/15/17 Tr. 1082-83 (Leonard); 3/13/
17 Tr. 551, 566-67 (Katz). Additionally, the Services maintain that 
because the 2012 rate structure resulted from a negotiated settlement, 
it reflects market forces, including an implicit consensus on such 
issues as substitutional effects. See 3/13/17 Tr. 580, 722 (Katz). More 
broadly, the Services assert the 2012 Settlement demonstrates the 
``revealed preferences'' of these economic actors. See 3/15/17 Tr. 1095 
(Leonard); see also Amended Written Direct Statement of Gregory K. 
Leonard, Trial Ex. 695, ] 72 (Leonard AWDT) (direct license agreements 
that track statutory structure evidence ``revealed preference''). 
Finally, the Services assert that the 2012 Settlement rate structure as 
benchmark is relevant and helpful because, although it was adopted five 
years ago, it is nonetheless a relatively recent agreement, covering 
the current rate period. See Katz WDT ]] 6, 71; 3/13/17 Tr. 608-09 
(Katz); Leonard AWDT ] 45 et seq.; 3/15/17 Tr. 1082 (Leonard).
    The Services' experts candidly acknowledge that the rate structure 
they advocate cannot be construed economically as the ``best'' approach 
to pricing in this market. See, e.g., 4/7/17 Tr. 5574-76 (Marx). 
Rather, the Services' experts uniformly link the fact that the marginal 
physical cost of streaming is zero to the need for a flexible rate 
structure, such as now exists. See, e.g., 3/20/17 Tr. 1829 (Marx); 3/
13/17 Tr. 558 (Katz); 3/15/17 Tr. 122 (Leonard). Indeed, Copyright 
Owners' economic experts acknowledge this underlying fact. See, e.g., 
3/30/17 Tr. 4086 (Gans) (streamed music is ``non-rival good.''); 3/27/
17 Tr. 3167 (Watt); 4/3/17 Tr. 4318 (Rysman); 4/13/17 Tr. 5917-18 
(Hubbard).
    Professor Katz noted that the existing revenue-based rate structure 
captures important specific aspects of the economics of the interactive 
streaming market, accounting for the variable willingness to pay (WTP) 
among listeners and the corollary variable demand for streaming 
services. See 3/13/17 Tr. 586-87 (Katz); see also Written Rebuttal 
Testimony of Leslie M. Marx, Trial Ex. 1069, ]] 239 et seq. (Marx WRT); 
4/7/17 Tr. 5568 (Marx) (present structure serves customer segments with 
variety of preferences and WTP).\47\ Professor Rysman, an expert for 
Copyright Owners, hypothesized that under the current rate regime 
overall revenues might be increasing because of movements ``down the 
demand curve'' (i.e., changes in quantity demanded in response to lower 
prices), rather than because of, or in add